Marlborough Lines Limited and Horizon Energy Distribution Limited

Published 1 September 2011

Introduction

The unsuccessful partial offer for Horizon Energy Distribution Limited (Horizon) made by Marlborough Lines Limited (Marlborough) in September 2009 resulted in the Panel holding a meeting under section 32 of the Takeovers Act 1993 and, subsequently, in judicial review proceedings in the High Court.[1] A number of developments in takeovers law and the Panel’s practice arose from the Horizon matter. These are discussed below.

Background

Horizon was an electricity lines company based in the Bay of Plenty. The Eastern Bay Energy Trust (EBET) held 77% of Horizon’s shares.

On 14 September 2009, Marlborough, another electricity lines business, based in the Marlborough region, gave notice that it would make a partial offer for 51% of the ordinary shares in Horizon.

On 28 September 2009, Horizon issued a revised profit outlook, which forecasted that Horizon’s after tax profit for the 2009/2010 financial year would increase from $4.5 million to about $6 million. The company gave a number of reasons for the change in forecast.

Under the Code, Horizon was required to issue a target company statement in response to Marlborough’s offer. Horizon did this on 13 October 2009.

In the target company statement, the directors of Horizon recommended that the shareholders reject Marlborough’s offer. The directors stated, among other things, that the offer did not adequately reflect the Board’s view of the full value of Horizon (the undervalue statement).

The target company statement included a report from an independent adviser, Simmons Corporate Finance Limited (Simmons), on the merits of the Marlborough offer. Simmons gave a valuation range for Horizon of $3.96 to $4.68 per share. The Marlborough offer was for $3.96 per share.

EBET did not support the offer. It made an announcement to this effect on 19 October 2010. Marlborough’s offer could not succeed without EBET’s support, given the size of EBET’s shareholding in Horizon. Accordingly, Marlborough’s offer failed when the offer period expired on 30 October 2009.

Section 32 meeting in March 2010

On 22 February 2010, Marlborough requested the Panel to hold a meeting under section 32 of the Takeovers Act to consider a number of allegations relating to various parties involved in Marlborough’s takeover offer. On 9 March 2010, the Panel gave notice to Marlborough and Horizon, and to Horizon’s adviser Cameron Partners Limited (Cameron Partners), that it would hold a section 32 meeting to consider two issues:

(1) Whether Horizon and/or the directors of Horizon had acted in compliance with rule 64 of the Code by issuing the revised profit outlook, if there was no reasonable basis for issuing that revised profit outlook; and

(2) Whether the directors of Horizon had acted in compliance with rule 64 of the Code by making the undervalue statement, if they had no reasonable basis for making that statement.

On 11 and 12 March 2010, the Panel received summonsed documents from Marlborough, Horizon and Cameron Partners. After reviewing these documents, the Panel added a further issue for consideration at the section 32 meeting, with the consent of Horizon:

(3) Whether Horizon and/or the directors of Horizon had acted in compliance with rule 64 of the Code, by issuing a revised profit outlook on 28 September 2009 that omitted to include information regarding a change in the application of an accounting treatment, including the impact of that change on the revised profit outlook.

The meeting was held on 22 March 2010 in Wellington. The Panel engaged the services of an expert in the electricity industry to assist it to understand the issue regarding the undervalue statement made by the directors of Horizon.

The Panel delivered its determination and statement of reasons on 10 May 2010. The Panel determined that Horizon had not acted in compliance with rule 64 in respect of the third issue (the omission from the revised profit announcement of any mention of the change in accounting treatment). The Panel found no other breaches of the Code by Horizon. The Panel considered that any mischief arising from the breach of the Code by Horizon was remedied by the disclosure about the change in accounting treatment, contained in the determination.

Panel’s fees and costs decision

Under the Takeovers (Fees) Regulations 2001, the Panel is able to recover certain of its expenses and costs that arise from holding a section 32 meeting.

On 20 May 2010, the Panel made its fees and costs decision for the section 32 meeting. The Panel allocated the costs between Marlborough and Horizon based on how the issues that were considered at the section 32 meeting were decided. Accordingly, Marlborough bore the costs attributable to the issues on which the Panel found no breach of the Code (two issues out of the three), and Horizon bore the costs attributable to the one issue on which the Panel found that there was a Code breach. The fees of the independent expert were not attributable to the issue in respect of which a breach of the Code was found by the Panel. Accordingly, the expert’s fees were allocated to Marlborough as well.

Rule 49 – Target company reimbursement

Under rule 49 of the Code a target company may recover its properly incurred takeover-related expenses from the offeror.

On 21 May 2010, the Panel received a request from Horizon for a further section 32 meeting. Horizon’s claim to Marlborough for the expenses that Horizon had incurred as a result of the takeover offer had not been paid. Horizon asked the Panel to consider whether Marlborough had failed to comply with the Code by not reimbursing the takeover expenses. On 4 June 2010, the Panel advised Marlborough and Horizon that it intended to hold the meeting.

Judicial review

The meeting, however, did not take place. On 23 June 2010, Marlborough commenced judicial review proceedings in the High Court, naming Horizon and the Panel as defendants. Marlborough sought review of three decisions taken by the Panel, and a fourth allegation, regarding the Panel’s processes, in relation to the March section 32 meeting, as follows:

(a) the decision not to consider at the section 32 meeting whether Horizon had breached the Code by failing to disclose in the target company statement a draft report for the board of the company from Cameron Partners;

(b) the decision to recover a portion of the costs of the section 32 meeting from Marlborough;

(c) the decision that the Panel had jurisdiction to hold a section 32 meeting to consider the dispute between Marlborough and Horizon over recovery of Horizon’s takeover costs; and

(d) alleged bias, because the Panel executive had previously reviewed a draft version of Horizon’s target company statement.

The hearing was held from 9 to 11 August 2010, and the Court gave its judgment on 12 October 2010. It found that the Panel had made an error of law in not considering at the section 32 meeting the issue of whether the Cameron Partners draft report should have been disclosed by Horizon. The Court did not, however, make a determination of the issue itself, nor order the Panel to do so. It was left open for the Panel to hold a further section 32 meeting on the matter (however, no section 32 meeting was convened by the Panel, nor requested by Marlborough).

On the second ground, the Court found that the Panel was entitled to make its costs orders, but ordered it to reconsider the decision with the benefit of submissions from Marlborough and Horizon, and guidance from the judgment.

Thirdly, the Court held that the Panel did not have jurisdiction to consider at a section 32 meeting a dispute over the recovery of expenses incurred by a target company.

Finally, the Court found that the Panel had not shown any bias. The Court considered that the Panel executive had a legitimate and beneficial role in reviewing draft takeover documents.

The Panel subsequently reconsidered its fees and costs decision, in accordance with the judgment, and made new costs orders against Marlborough and Horizon.

New developments

The section 32 meeting, and judicial review proceedings that followed, led to a number of noteworthy developments. These are discussed below.

Procedural matters

The section 32 meeting was held in two parts. The first part, which covered administrative and procedural issues, took place on 12 March 2010 at the Panel’s offices in Wellington with some participants attending in person and others joining by teleconference. The meeting was then adjourned, following an application by Horizon, until 22 March 2010 for the substantive hearing, with all the participants attending in person. The adjournment was requested by Horizon to give it adequate time to prepare its defence. The Panel considered that it was appropriate in the interests of natural justice to grant the application in the circumstances.

Under normal circumstances, there are limitations on the length of time that the Panel could adjourn a meeting. If the Panel decides to call a section 32 meeting, the meeting must be held within seven days.[2] The short time frame in the Act anticipates that a takeover is in progress when the meeting is held. The Panel will grant applications for adjournment of section 32 meetings if it is in the interests of natural justice to do so. However, such applications will be considered in light of the timeframes under the Act which the Panel must observe when holding section 32 meetings. This may, in practice, limit the time available for adjournments.

Additional issue considered at the section 32 meeting

The 9 March 2010 notice of meeting stated that the Panel would consider two issues at the section 32 meeting. As noted above, before the meeting was held, the Panel had summonsed documents from the parties. As a result of its review of these documents, the Panel had decided that there was a third issue that had to be considered at the section 32 meeting.

The Panel is not limited to considering only the issues which are stated in the notice of meeting. The Panel may consider further issues should they arise in the course of the proceedings, provided that it follows the rules of natural justice.

In light of the new issue being raised, the Panel had several options open to it. It could have adjourned the meeting, issued a new notice of meeting which included all three issues, and then reconvened at a later date. Alternatively, all the issues could have been considered at the original meeting, provided that there was no objection from any of the parties. The latter approach was adopted for the section 32 meeting. The approach was the most appropriate in the circumstances. In different circumstances, it may be appropriate for the Panel to issue a new notice of meeting.

Misleading or deceptive conduct by omission

The Panel made a determination after the section 32 meeting that the omission by Horizon to disclose the change in accounting treatment in the revised profit forecast was misleading. The Panel made this decision because it considered that there would have been a reasonable expectation that the change in accounting treatment (being material information) would have been disclosed. The reasonable expectation was from the members of the target audience of the revised profit forecast. The Panel considered that that audience would have included retail shareholders in Horizon, the general investing public, sophisticated investors (such as EBET), Marlborough as the offeror, the independent adviser on the merits of the offer, and market commentators and analysts.

Rule 64 of the Code prohibits a person from engaging in conduct in relation to any transaction or event that is regulated by the Code that is misleading or deceptive, or likely to mislead or deceive. “Engaging in conduct” for the purposes of rule 64 of the Code is not limited to positive acts. It also includes omitting to act, as was the case with Horizon and its failure to disclose a change of accounting treatment as part of the basis for a revised profit forecast.

Jurisdiction for rule 49 target company reimbursement disputes

The Court held that the Panel does not have jurisdiction to determine rule 49 claims for reimbursement by a target company of its takeover expenses. Although the Court considered that the Panel, as a specialist regulator, might be the most suitable body to determine rule 49 expense claims, the ordinary principles of statutory interpretation, when applied to the Takeovers Act and Code, indicated that the Panel did not have jurisdiction to make such determinations.

A number of experienced takeovers practitioners have expressed to the Panel their concern at the unavailability to the market of the Panel’s valuable role in settling these disputes quickly and cost effectively. The Panel is, therefore, proposing an amendment to the Takeovers Act to clearly provide this jurisdiction to the Panel and to afford a purpose-built procedure for dealing with these reimbursement disputes.

Costs orders made by the Panel

Generally, the Panel’s approach to making costs orders under the Takeovers (Fees) Regulations is to seek to recover the costs it incurred in holding a section 32 meeting from:

(a) the party that requested the meeting; and/ or

(b) the person or persons against whom the Panel made a determination following the meeting.

In making the allocation between or among them, the Panel would usually have regard to the relative degrees of success by those persons on the issues considered at the meeting. The Panel has issued administrative guidelines on how it approaches costs matters after section 32 meetings.[3]

There is no requirement that the Panel hear submissions from the relevant parties before it makes a costs decision. In some circumstances, the application of the Takeovers (Fees) Regulations and the administrative guidelines may be simply a mechanical exercise. In such a case, it would not be necessary for the Panel to hear submissions on the allocation of costs. In other instances, however, the Panel’s decision may include an element of judgement in respect of which submissions from the relevant parties would be appropriate. The Court considered that the costs award relating to the Horizon section 32 meeting fell into the latter category.

Role of Panel executive’s review of draft documents

The High Court did not accept a submission from Marlborough that there is no jurisdiction under the Takeovers Act for the Panel to review draft takeover documentation.

The Court considered that the Panel may properly assist market participants with a view to ensuring compliance with the Code, in an attempt to avoid breaches of the Code and consequent section 32 meetings. Justice MacKenzie said:

“I see nothing in the Act to confine the Panel to the role of ambulance or policeman at the bottom of the cliff, to the exclusion of its being also a fence builder at the top.”[4]

The Panel is aware that the market appreciates the informal assistance given to it by the Panel executive undertaking the review of draft documents. The Panel encourages all practitioners to engage with the executive early in the drafting process. The Panel’s staff is there to help.

Footnotes:

[1] Marlborough Lines Limited v The Takeovers Panel & Horizon Energy Distribution Limited (12 October 2010) CIV-2010-485-001150, HC Wellington, MacKenzie J

[2] Takeovers Act 1993, s32(1)

[3] Available online at http://www.takeovers.govt.nz/legislation/act/fees.php

[4] Marlborough Lines Limited v The Takeovers Panel & Horizon Energy Distribution Limited, para [48].