Independent Advisers – Lowe Corporation and Rule 20

Published 1 September 2003

On 9 October 2002 Lowe Corporation Limited (Lowe) made a full takeover offer under the Code for all the shares in Blue Sky Meats (N.Z.) Limited (Blue Sky). Blue Sky is a meat processing company based in Southland. It is not a listed company but qualifies as a Code company because of its size and number of shareholders.

An independent adviser’s report on the merits of the offer was provided to the shareholders of Blue Sky as required by rule 21 of the Code.

A key feature of the Code is that a takeover offer must “be on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer” (rule 20).

An issue arose in the Lowe takeover in relation to rule 20 because of an existing contract between Blue Sky and Horizon Meats New Zealand Limited (Horizon). Horizon, a 37% shareholder in Blue Sky, had an exclusive marketing contract with that company under which all of Blue Sky’s meat products were sold through Horizon.

As part of negotiations leading up to the takeover offer Lowe and Horizon agreed that Horizon would accept Lowe’s offer once it was made, and Lowe would procure Blue Sky to pay Horizon some $2.7 million for terminating the marketing contract early.

Horizon was a substantial shareholder in Blue Sky so the proposed termination payment of $2.7 million raised the issue of whether Lowe’s offer complied with rule 20.

The independent adviser’s comments on the termination payment included:

In our view it is not unreasonable to expect a payment to be made to Horizon to buy out this contract. However we do not have access to any further information to verify this and therefore we cannot make a determination as to whether $2.7 million is a fair value for this transaction.

The effect of any overcompensation for terminating this contract could result in additional consideration being received by Horizon. Notwithstanding this, the offer for the shares to Horizon and all other shareholders is the same, i.e. $4.50, and considered by us to be fair.

These comments left open the question whether Lowe’s offer was in breach of rule 20. The independent adviser did not assess the proposed payment of $2.7 million to Horizon. This was of concern to the Panel because without an assessment shareholders would not be fully informed of the merits of the bid, particularly in relation to rule 20. The Panel also considered that the independent directors of Blue Sky had a responsibility to see that the issue was properly addressed.

The Panel held a meeting under section 32 of the Takeovers Act to determine whether Lowe’s offer complied with rule 20. The Panel retained its own expert valuer. After considering evidence received from Lowe, Blue Sky and Horizon the Panel determined that the consideration offered for terminating the marketing contract was reasonable and did not include additional consideration to Horizon for the purchase of its shares. The Panel was satisfied that there was no breach of rule 20 and that the same consideration was being provided to all holders of securities of Blue Sky.

The full text of the Panel’s determination is on the Panel’s website.

This was the first time the Panel had determined an issue relating to rule 20 involving the payment of consideration to a shareholder that was related to an offer but was not a payment for shares. The Panel was compelled to hold the meeting because the independent adviser had not properly dealt with the issue in its report.

Independent advisers and target company directors are reminded of the importance of rule 20 and of the need to address issues that arise under that rule.