The demons of AXA's directors

Wednesday March 2 is set to be one of the saddest days in Australian finance history. That will be the day of the AXA Asia Pacific extraordinary meeting where AXA shareholders are highly likely to agree to sell the Asian segment of their company to the French without having all the facts before them.

As I understand it the board has the numbers because shareholders have backed directors recommendation. Although the deal is clearly not in the national interest I can't see Treasurer Wayne Swan rocking the boat given what's happening with the carbon tax.

Yet if I was a director of AXA Asia Pacific, I would be nervous and in the next 48 hours I would seek personal legal advice because, in my view, the individual directors maybe taking a high personal risk.

There is no risk in their actual recommendation to sell to the French for about $10 billion as part of the AMP takeover bid. Independent expert Grant Samuel did an excellent job comparing the French offer price with the market for similar companies and concluded that there was a "compelling” reason to accept the bid. Directors then embraced that recommendation. There is no question that AXA Asia Pacific acted honesty and sincerely believed in the recommendation they made to shareholders.

So why are they personally vulnerable? Two enormous events happened to AXA Asia Pacific, one just before the bid was made and the other earlier this month after the bid had gone to shareholders. Neither was explained to Australian shareholders. The first event was the decision to joint venture with China's largest bank, the Industrial and Commercial Bank of China (ICBC). Although Australia and the French lowered their equity to accommodate ICBC equity, legally the AXA group is still a foreign company in China but, working with the French, Australia has negotiated a deal that will give us access to the biggest branch network in China and a 200 million person customer base. We are now effectively looking at a local company in China with undreamed of growth prospects.

The directors could legitimately argue that there are a lot of "ifs” in this deal. It has to be approved by the regulators. It has been approved at the top of the bank but each ICBC branch has to be convinced to embrace the Australian-French product. Accordingly it might not work. Given the risks directors might still legitimately recommend selling to the French but they should have explained the deal to their shareholders. This is potentially the biggest non-mining deal any Australian company has done in China and if it does work it will transform the Australian company and our relations with China. AXA's Australian and Asian management were jumping out of their skins with excitement when the deal was done. But they are now silent.

Currently the only way AXA shareholders can understand the potential significance of this deal is to read my comments or those of Terry McCrann. Not good enough.

But the second omission is worse. Unlike other companies life companies each half year get an actuarial valuation which establishes their base worth. I can't think of a life company in the US Europe, Asia or Australia that achieved a 36 per cent rise in the actuarial valuation of its largest operation in the year to December 31 and increased that valuation at an annual rate of over 40 per cent in the half year to December 31 who would not shout the amazing news to shareholders from the rooftops. But AXA directors made no mention of it in their comments and it was not easy to discover the boom (See What's up with AXA's results?, February 15).

AXA directors could argue that the increase was based on 2008 currency; that the figures are calculated differently from those used to value the company in the independent experts report; that they include minority interests and that maybe it's a once off. All those situations maybe true. But surely shareholders about to sell their Asian business for $10 billion are entitled to know why the Australian company is achieving these incredible growth rates which are much bigger than anything previously achieved. AXA shareholders are entitled to a discussion about what is currently happening to the company they are being asked to sell. After receiving that information they may still decide to sell because shares in AXA will probably fall in the short term if the bid is rejected. But AXA shareholders would then have made an informed decision.

Let's assume AXA China takes off (as I think it will) and the Asian growth rates in the December half year are maintained or increased (as I think this is highly likely) then what the French are buying for $10 billion may be worth $20 billion in a few years. Unfortunately Australia is now a litigious society and once Slater Gordon or others get onto this, the directors may have to explain in court why they did not tell shareholders about the growth rate or explain to shareholders the potential implication of the China deal. In the next 48 hours they had better work out a good reason for the non disclosure. Relying on a generic statement by Grant Samuel in any future court case may not be sufficient.

Returning to Wayne Swan. I understand that it is being suggested to him (not by the AXA Asia Pacific directors) that if he knocks the AXA bid back it will frighten all other foreign bids. That's absolute rubbish. AXA Asia Pacific is unique in Australia because it operates under a governmental decree established by Paul Keating and Ralph Willis so Australia could benefit from Asian growth (Swan's defining AXA act, February 8). It was a magnificent decision. I think shadow ministers Joe Hockey and Andrew Robb have a clear sense of the national interest and are unlikely to oppose Swan if he acts in the national interest. This is the only chance we will ever have to have a major stake in Asian financial services and it gives us a unique set of joint ventures and alliances – most of which were established by Australian management.

But I am afraid the die is cast.