The legal chicanery employed by Victoria’s Brumby Labor government in 2008 has proved semi-successful. That doesn’t make it more palatable, either to Tabcorp shareholders or the Napthine government that has inherited its outcomes.
Victoria’s Supreme Court yesterday handed down its judgements on actions taken by Tabcorp and Tatts against the changes to the state’s gaming industry that resulted in them losing their gaming licences without compensation, despite provisions in both their licences that appeared to guarantee them compensation if the licences weren’t renewed.
Justice Hargrave, however, held that while Tatts was entitled to receive $451 million and interest as compensation, Tabcorp’s claim for $686m had failed.
In handing down his judgement Justice Hargrave, however, said that he accepted that the outcome for Tabcorp was "manifestly unfair and unreasonable" and said it was "an unfortunate case of the harsh reality of sovereign risk".
In 2008 the Brumby government devised a 'clever' plan to try to avoid either renewing the gaming licences or reimbursing the two companies the $1.3 billion or so that they and their shareholders believed their contracts with the government entitled to them if the licences were awarded to third parties.
Instead of putting the licences up for a tender, the government created a new industry structure. This is because under a tender, the incumbents would have been heavily favoured to retain their licences in a process which, because of the nature of their contracts, would inevitably have produced only modest proceeds for the state.
The new structure offered entitlements to gaming machines to pubs and clubs instead, arguing that because the licences were neither renewed nor awarded to third parties, there was no legal obligation to pay the companies compensation.
The auction of those entitlements raised about $980m, about $3bn less than they were worth, according to the Victorian auditor-general.
Now, thanks to Tatts’ victory, the net proceeds from Labor’s trickery will be at least halved. Tabcorp may yet appeal the outcome of its case.
As Justice Hargrave said, the outcome is unfair and unreasonable and a very clear demonstration of sovereign risk. Australian state governments are expected to honour their obligations, not to use their legislative powers to circumvent them.
The compensation arrangements were detailed in the prospectus for the float of Tabcorp in 1994, a provision that was included to maximise the proceeds to the state government by ensuring Tabcorp didn’t have to amortise the value of licence fee through its profit and loss statements,which would have more than halved its reported earnings and the float proceeds. Tabcorp also held an indemnity from the state for any loss suffered as a result of a future change in its legislation.
The outcome and the disparity of the experience of Tabcorp shareholders (who paid for that compensation provision) and that of the Tatts shareholders leaves a lasting stain on the reputation of the Victorian government and leaves the Napthine government with the unpleasant task of financing a payment approaching half a billion dollars that should have been made by its predecessors.