BABCOCK & BROWN

Group. The interests of these Employee Stakeholders may be
different to those of other Shareholders. The Ordinary Shares
may remain tightly held with limited liquidity on ASX.
The size of the Employee Stakeholding significantly reduces the
likelihood of a takeover of Babcock & Brown. All Employee
Stakeholders who received or purchased Ordinary Shares in
the IPO, or the Shareholder they nominated to hold those
Ordinary Shares in the IPO, have entered into voluntary
escrow arrangements in relation to those Ordinary Shares, and
other arrangements which will assist with the management of
an orderly market should they wish to sell down any of those
shares post the escrow period. The US Executive Stakeholders
who received or purchased B Class Shares in BBIPL, or the
shareholder they nominated to hold their B Class Shares, have
entered into equivalent escrow arrangements. However, if HVB,
or Employee Stakeholders sold their Ordinary Shares, it may
adversely impact the market price of Ordinary Shares.
The following parcels of Ordinary Shares will be released
from escrow at the following times:
• 27,320,781 Ordinary Shares on the date of the release to
ASX of the Preliminary Final Results for the year ending
31 December 2005;
• 22,027,781 Ordinary Shares on the date of the release to
ASX of the Preliminary Final Results for the year ending
31 December 2006; and
• 22,027,780 Ordinary Shares on the date of the release to
ASX of the Preliminary Final Results for the year ending
31 December 2007.
6.2.4 Employee misconduct
The Babcock & Brown Group runs the risk that employee
misconduct may occur. Misconduct by employees could involve
the improper use or disclosure of confidential information
resulting in regulatory sanctions and serious reputational or
financial harm. Whilst the Babcock & Brown Group believes
that its processes for preventing employee misconduct are
adequate, it is not always possible to avoid employee misconduct
and the precautions taken to detect and prevent this activity may
not be effective in all cases.
6.2.5 Reputation and adverse publicity
The Babcock & Brown Group’s business relies to a large extent
on relationships and a reputation for integrity and high-calibre
professional services to attract and retain clients. As a result, if a
client is not satisfied with the services provided or the Babcock
& Brown Group is involved in litigation relating to a transaction
in which it is involved, it may be more damaging to the Group
than in other businesses. The Babcock & Brown Group may
incur significant legal expenses in defending itself against any
litigation arising in such cases and may also incur significant
reputational and financial harm if litigation is successful.
The Group’s business has, over a number of years, included
providing advice to numerous clients on leasing and other
transactions. Some of those transactions are now subject to
litigation involving the Group’s clients (including some actions
commenced by the US Internal Revenue Service), and others
may be litigated in the future. The Group, as advisor, is typically
not a party to the litigation, and is not exposed to the risk of
material financial liability as a result of the litigation. However,
as some of these actions involve alleged corporate tax shelters
there is a higher than usual risk of potential adverse publicity
surrounding the litigation, and this publicity may draw attention
to the Group’s role in the relevant transactions. As with any
negative publicity, there is the potential for damage to the
Group’s reputation and to the goodwill of the business.
While the Babcock & Brown Group has full ownership
of the Babcock & Brown name it has allowed, on occasions,
third parties to use the Babcock & Brown name in relation
to certain activities, principally comprising joint venture
activities in which the Group is involved.
6.2.6 Liability for advice/arranging
The Babcock & Brown Group’s business often involves providing
advice and assisting in arranging transactions for third parties.
In doing so the Group could be held liable for this advice in
certain circumstances. In order to mitigate this risk, the Group
seeks, wherever possible, to limit any potential liability to parties
by way of contract to the fees paid on the transaction and
generally includes express representations from the third party
that the Group has not provided any tax advice. The Group also
carries indemnity insurance to help defray this risk.
6.2.7 Transaction reliance
Historically, a large proportion of revenues have been earned
from fees on transactions that are sometimes conditional upon
successful completion of the client’s transaction. As a result,
high activity levels in any period are not necessarily indicative
of continued high levels of activity in the following or any
other period. In addition, when an engagement is terminated,
whether due to the cancellation of a transaction due to market
reasons or otherwise, the Group may earn limited or no fees
and may not be able to recoup the costs incurred prior to
that termination.
BABCOCK & BROWN SUBORDINATED NOTES 53