‘Thanks James Hardie’ might have been heard around the boardroom at CSR yesterday after the Federal Court stopped its $3 billion plan to split into two companies.
The court blocked the split because the potential impact on asbestos disease sufferers is "inconsistent with public policy and commercial morality".
Justice Margaret Stone said in her judgement in the Federal Court in Sydney the demerger would hamper CSR’s ability to meet asbestos liabilities.
"As a result of the demerger CSR is less likely to meet its asbestos liabilities," Justice Stone said.
The news obviously stunned CSR which said in a statement late yesterday:
"The Board of CSR believes the strategy of separating its two very different operating businesses has the potential to create additional shareholder value.
"CSR has always taken its asbestos liabilities very seriously.
"In developing the demerger proposal, the Board has undertaken significant due diligence and given prudent and comprehensive consideration to conclude that CSR will continue to responsibly meet asbestos claims, as it has for over 20 years.
"The Federal Court decision appears to have broad implications.
"CSR will review the judgement and will advise the market when it has further considered all legal and commercial aspects of the matter."
So no immediate declaration from CSR that it will appeal or abandon the split idea.
It was concerns over the past few years (and a bit belated at that); about the funding for Hardie’s escalating asbestos claims that triggered the questioning of the CSR split.
Even Hardie questioned the CSR split, an interesting show of corporate self-interest.
Hardie’s move offshore back in 2001, after giving assurances to the NSW Supreme Court that the structure it was leaving behind to fund claims, was adequately financed, was later found to have been wrong.
ASIC launched court action over the claims and won a judgement, but until after the NSW Government held a special inquiry which further undermined the Hardie claims and forced a recapitalisation of the financing for the company’s asbestos claims.
With ASIC, the corporate regulator and asbestos sufferers groups questioning the level of funding and support for CSR’s asbestos claims should the split go-ahead, there was a growing possibility the move could be blocked.
Yesterday Justice Margaret Stone in the Federal Court rejected CSR’s application for an order convening a shareholder meeting to vote on the demerger, meaning that the scheme of arrangement cannot proceed.
Besides, ASIC concerns about the impact of the demerger on asbestos compensation were also raised by the NSW Government, the Asbestos Injuries Compensation Fund (a body set up by James Hardie after its compensation trust was found in 2004 to be grossly underfunded, which often shares liability for compensation with CSR) and James Hardie.
The judge said expert evidence put to the court by CSR and these objecting parties showed "divergent" opinions on whether CSR would be able to meet its liabilities to asbestos victims if the spin-off of its sugar business into a new company proceeded.
"It is not the role of the court to resolve such uncertainty however the degree of uncertainty evidenced by the divergent opinions has led the court to conclude that the draft statement explaining the implications of the proposed demerger to shareholders would not adequately disclose those uncertainties," Justice Stone said.
"Moreover, the court has also concluded that the potential disadvantage to those having asbestos related claims is such that the demerger is inconsistent with public policy and commercial morality," she said.
CSR shares went into a trading halt yesterday ahead of the ruling.
The halt was lifted late yesterday after CSR released the above statement to the exchange and the shares ended up 1 cent at $1.855.
Last month, CSR rejected an approach from China’s Bright Food Group, to buy its sugar and renewable energy division for $1.5 billion.
A question now is whether offers like this would seem to be blocked by justice Stone’s ruling because the assets would have to be ‘demerged’ from CSR.
The upshot of the judgement could be (if not overturned in an appeal) that CSR remains in its current structure for years to come.
