Upstream acquisitions

Published 1 January 2005

The Code was deliberately constructed to capture the acquisition of voting rights in Code companies by means of a transaction upstream from the direct holder of voting rights in the Code company. Compliance with rule 7(c), which requires the approval of shareholders given at a meeting of the Code company held in compliance with the requirements of the Code, is the appropriate mechanism to be utilised in respect of such upstream acquisitions. Exemptions have been sought as an alternative to this procedure. The Panel’s attitude to exemptions for upstream acquisitions can be demonstrated by a discussion of a recent exemption application made by Vector Limited.

In October 2004 Vector advised the Panel that it wished to acquire control of 64.25% of the voting rights in NGC Holdings Limited which were held by a New Zealand holding company of The Australian Gas Light Company (AGL). The Code provides two alternatives which Vector could utilise to acquire control of these voting rights:

  • a full takeover offer for NGC which AGL could ensure was accepted by its holding company; or
  • approval by shareholders under rule 7(c) to a transaction which would result in Vector acquiring the AGL subsidiary which held the NGC shares.

The direct takeover alternative had taxation disadvantages for AGL and AGL did not wish to go through the shareholder approval process under rule 7(c).

Vector sought an exemption from rule 6(1) of the Code to enable it to become the controller of the 64.25% of the voting rights in NGC by acquiring AGL’s New Zealand holding company directly on the basis that it would also make a takeover offer for the remaining shares in NGC for the same consideration per share that was used in calculating the price for the AGL holding company.

Vector and AGL could have utilised the mechanisms which the Code provided. Instead they proposed to structure the transaction in a way that did not comply with the Code to provide taxation benefits and commercial convenience to AGL. This is not a proper ground for the exercise of the Panel’s exemption power.

Vector had argued that there was a precedent for the exemption which it sought. They argued that the Panel had previously granted an exemption to Origin Energy New Zealand Limited to allow the acquisition of control over more than 50% of the voting rights in Contact Energy Limited, a Code company, by means of the acquisition of a New Zealand holding company from its parent Edison Mission Energy.

The facts of the Origin Energy exemption were entirely different from those of the Vector application. The circumstances of the Origin Energy application were unique in that loss of complex upstream financing arrangements could have resulted in a negative pricing effect for all Contact shareholders if the sale of 3 CODEWORD January 2005 the controlling block of shares had not taken place at the holding company level. The Panel’s exemption was not granted to accommodate the commercial interests of the holder or acquirer of the controlling shareholding block. The Panel emphasises that every exemption application is treated on its own merits. Prospective applicants need to be cautious about assuming that an exemption will be granted to them on the basis of an apparently similar previous exemption.

There is one particular qualification to the Panel’s policy regarding upstream transactions. The Panel has in the past granted exemptions from the fundamental rule in respect of overseas amalgamations or takeovers which have an impact on the control of the voting rights of New Zealand Code companies provided they were not carried out for the purpose of increasing any person’s control percentage in that Code company. The Panel will only grant such exemptions where it is satisfied that the change of control of voting securities in the Code company is merely incidental to the overseas transaction and the shares in the Code company represent a very small percentage of the assets being acquired. An example of an exemption granted in such a situation is the Takeovers Code (Canadian National Railway Company) Exemption Notice 2001.