Estimates and disclosure of contingent risks are front and center these days in various contexts. Thus, asbestos-specific estimates and disclosures are prominently mentioned in a new  Australian appellate decision in CSR. The opinion was issued at the end of last week, and provides some narrow guidance on solvent schemes of arrangement for companies facing asbestos claiming. A prior post here  describes the trial court litigation regarding the efforts of CSR, an Australian business, to obtain judicial approval of a  reduction of its its asset base when it faces admittedly significant current and future asbestos claims.  The proposed reduction of assets would be accomplished through a "demerger" (in the US, we would call it a spinoff). 

The federal appellate court opinion in CSR is worth reading for those interested in the social and legal policy issues involving tort claiming and corporate transactions. That said,  the opinion is narrow. In short, the court did not approve the demerger, and did not find the demerger reasonable. Instead, it narrowly held that the trial court should allow the process to move forward to a meeting of creditors. 

The future developments in CSR will be interesting. At present, CSR’s demerger efforts are opposed by asbestos claimants, AISIC (the Australian counterpart to the SEC), a regional government  fund obligated to pay claims by persons suffering from asbestos-related diseases, and by a significant asbestos co-defendant, James Hardie.  To date, the objectors have not cross-examined various actuaries who prepared estimates of the future asbestos payments by CSR. it will important and interesting to see the substance that emerges from cross-examination of actuaries, if it occurs.  Cross-examination did not occur to date because the parties structured  the proceedings that way and allowed much of the information to remain "confidential."  The appellate court opinion seems to put the reasonableness of the actuarial reports squarely into play for  cross-examination and argument during future proceedings. Thus, the appellate court explained:

" 56  As to the argument advanced on behalf of the James Hardie parties, the reports prepared by CSR’s actuaries purport to quantify the present value of CSR’s future long term exposure to asbestos claimants. There is nothing in these reports which suggests that any category of asbestos claimant has not been included in their actuarial assessment. There is, accordingly, force in CSR’s argument that the learned primary judge erred in treating the disclaimer in the Grant Samuel report as indicating that the assessments made on behalf of CSR did not include persons who have not yet contracted an asbestos related disease as a result of exposure for which CSR is responsible. On the other hand, this important question could have been resolved beyond the possibility of doubt by cross-examination of the relevant authors. That did not occur in the proceedings before the learned primary judge. To say this is in no way to level a criticism at her Honour: the case was conducted before her in accordance with the wishes of the applicant and the interveners. To say this is, however, to recognise that an application for the convening of the first meeting of shareholders under s 411(1) of the Act is not an ideal occasion to attempt to resolve such issues.  " (emphasis added)

  

What a great legal term of art – "scheme of arrangement." The term has multiple but related nuanced meanings and applications because "schemes" are essentially corporate law opportunities to end or alter the business life or structure of a corporation. Depending on the nation and the particular use, schemes may have varying outcomes when used in the diverse ways that are possible in the various nations that arise from the former British Empire.

This post focuses on an attempted "scheme" under Australian corporate law. In this instance, the scheme consists of the efforts of a public company, CSR, to move forward with a "demerger" (a "spin-off"  in the US) that would split one public company  into two "more focused"  public companies. Only one of the emerging companies would, they hope, be liable for asbestos bodily injury or property damage claims that will or may arise from past ownership of a crocidolite mine and sales of various asbestos-containing products. Thus, by dividing the company into two pieces. the proposed demerger would reduce the amount of corporate assets available to pay the current and potential future asbestos claims that arise from past business operations. The opinion explains the numbers as follows:  "In its financial statements for the half year ended 30 September 2009 CSR has recognised a provision of A$446.8 million for current and future asbestos liabilities. This comprises 10% of CSR’s total assets as at 30 September 2009 but, based on the pro forma balance sheet produced by CSR as at 30 September 2009, would comprise 18% of New CSR’s assets at that date."

Continue Reading Schemes of Arrangement – CSR’s Demerger Effort Thwarted by Objections Regarding Its Potential Asbestos Obligations

A scheme of arrangement is a UK term that applies to a variety of legal proceedings, including proceedings in which a solvent insurer seeks to end its operations – for its convenience – and to put an end to the life of insurance policies that pay claims based on an “occurrence.” Occurrence policies have cost insurers billions of dollars paying for underlying asbestos claims.

Insurers like such schemes because they can shut down operations and seek to end their life without waiting for all claims to mature/occur/manifest. In general, schemes are disfavored by insureds that sold products that may produce long-tail injuries. Why ? Because they paid for long term coverage but the scheme ends the coverage before all claims may have manifested themselves.

In a recent scheme in Scotland, the trial court had to consider these issues in a scheme proposed by Scottish Lion. Here is a summary of the Red Lion opposition from the law firm – Covington & Burling – that opposed the scheme for its insured clients. Is that a winning rationale ? Stay tuned for the answer.