Corporate Advisory

16 Sep 2008

Amalgamations and Schemes of Arrangement: The Panel Takes Charge

The Takeovers Panel recently made recommendations to the Minister of Commerce for changes to the rules on amalgamations and schemes of arrangement for companies that fall under the Takeovers Code (Code Companies). If implemented, the changes will limit the availability of amalgamations and schemes as mechanisms for effecting changes of control in Code Companies. We have doubts regarding the merits of the changes. We outline the Panel's recommendations, and consider the implications of the changes, below.

Existing Regime - Panel’s Concerns

Currently there are a number of transaction structuring options for a bidder wishing to take control of a Code Company. A takeover offer regulated by the Takeovers Code is one option, but there is also the option of seeking agreement of the Code Company to an amalgamation under Part 13 of the Companies Act 1993 or a court-approved scheme of arrangement under Part 15 of the Companies Act. A Part 15 scheme can also effect an amalgamation - this is often done where the court is satisfied that the scheme is fair to shareholders and, accordingly, is willing to permit it to proceed without minority buy-out rights which would otherwise be triggered under Part 13.

The Panel has for some time expressed concern that Part 13 amalgamations and Part 15 schemes circumvent the Code, when they are used to effect a change of control in a Code Company. According to the Panel, this circumvention prejudices shareholders, exposes minority shareholders to unfairness and damages the international reputation of the New Zealand market.

Our view is that these alternative transaction structures are legitimate mechanisms for changes of control, each with its own in-built protections for minority rights. Specifically, shareholders of amalgamating companies are protected by minority buy-out rights, and shareholders of companies entering into schemes of arrangement are protected by the supervision of the court. Both amalgamations and schemes may only be effected with the agreement of the target company, so the board of the target company protects the shareholders' interests. Moreover, these alternative mechanisms are necessary for giving effect to the will of the majority, therefore promoting allocative efficiency.

We expressed our views to the Panel earlier this year in response to its call for submissions on this topic (see our February 2008 FYI, entitled Schemes of Arrangement and Amalgamations - their place in our legal landscape).

Panel Recommendation - Prohibition On Part 13 Amalgamations For Code Companies

The Panel has recommended that amalgamations under Part 13 of the Companies Act should no longer be available for Code Companies. The proposal is designed to prevent deals similar to the Waste Management amalgamation with Transpacific Industries in 2006.

Panel Recommendation - Restrictions On Part 15 Schemes Of Arrangement Under The Companies Act

The Panel has recommended that schemes of arrangement remain available for Code Companies. However, there are two significant proposed changes.

"No Objection" Clearance from the Panel

The Panel proposes that, before a court may approve a scheme, it must be satisfied that shareholders would not be disadvantaged by the transaction proceeding outside the Code. Alternatively, promoters of the scheme may obtain and put before the court a statement from the Panel that it has no objection to the scheme. The Panel will continue to appear at scheme hearings where it objects to a proposed scheme.

The practical effect of this is that a proposed scheme will now be subject to the Panel's scrutiny. The Panel has not yet made known the details of the criteria, timing or cost for issuing a "no objection" statement, but has said that the criteria are likely to include the level of information for shareholders and appropriate voting arrangements for shareholder interest groups. According to the Panel, any additional cost is likely to be negligible because of the existing requirements under Part 15 and the requirements for listed companies, which comprise the majority of those likely to be affected.

Increased Approval Thresholds

The Panel proposes that, to be effective, a scheme affecting control of a Code Company would need to be approved by 75% of votes in each interest class, and the approving votes would have to represent at least 50% of the total voting rights in the Code Company.

The implications of this are significant. For a proposed scheme affecting control of a Code Company to proceed, the holders of at least 50% of the voting rights in the company would have to vote in favour. For most companies, securing the required level of participation would not be realistic.

Conclusion

The Panel's recommendations to the Minister bring potential changes to the rules on amalgamations and schemes of arrangement for Code Companies a step closer. In our view, the recommendations represent a retrograde step, which will have a detrimental effect on economic efficiency. In the aftermath of the looming elections, this issue will be one to watch.

Authors

Kevin Jaffe

Partner - Corporate & Commercial

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Shelley Cave

Partner - Corporate & Commercial

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Peter Hinton

Partner - Corporate & Commercial

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Don Holborow

Partner - Corporate & Commercial

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Michael Pollard

Partner - Corporate & Commercial

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Mark Verbiest

Consultant - Corporate & Commercial

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Alex Campbell

Senior Associate - Corporate & Commercial

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