Schemes of Arrangement And Amalgamations Involving Code Companies Recommendations to the Minister of Commerce

Schemes of Arrangement And Amalgamations Involving Code Companies Recommendations to the Minister of Commerce

Schemes of Arrangement And Amalgamations Involving Code Companies
Recommendations to the Minister of Commerce

THE CODE

12.

The Code was introduced to protect the interests of all shareholders in respect of changes of control of publicly traded and other significant companies.

13.

Prior to the introduction of the Code effective control of publicly traded companies could be passed without the participation of the majority of shareholders. Control could pass by the sale of the shares of a large shareholder without the involvement of remaining shareholders. The Code ensures that all shareholders in publicly traded companies have equal treatment and participation in takeover situations and as a result encourages greater confidence among investors.

14.

The Code was also intended to encourage greater confidence in the integrity of the New Zealand market for international investors.

15.

The Code governs changes of control of "code companies" which are defined as companies incorporated under the Companies Act which:

are a party to a listing agreement with the New Zealand Exchange Limited (or were a party to a listing agreement in the previous 12 months); or
have 50 or more shareholders and $20 million or more of assets.

16.

Rule 6 of the Code, referred to as the fundamental rule of the Code, prohibits any person from becoming the holder or controller of more than 20% of the voting rights in a code company except by utilising one of the mechanisms set out in rule 7 of the Code. The main mechanism under rule 7 which can be used to acquire a code company shares is a takeover offer. There are also provisions permitting increases in the level of voting rights by the acquisition or allotment of voting securities with the approval of disinterested shareholders of the code company.

17.

The purpose of the fundamental rule and the mechanisms contained in rule 7 is to ensure that if there is to be a change in the control of the code company, all shareholders have the opportunity to participate in the process.

18.

In order for an offer, acquisition or allotment of shares which would otherwise be in breach of rule 6 to proceed the change of control must have the support of a specified level of shareholders of the code company as follows:

A full takeover offer must be conditional on the offeror achieving control of more than 50% of the voting rights in the code company.
An acquisition or allotment must be approved by a resolution of more than 50% of the shareholders of the code company who are entitled to vote and who vote on the relevant resolution at a meeting of shareholders¹. Parties involved in the acquisition or allotment and their associates cannot participate in the vote².

19.

The Code requires that in respect of any proposed change of control shareholders of the code company are provided with a document which provides them with information to enable them to decide for themselves the merits of an offer, acquisition or allotment. In respect of a takeover offer shareholders receive an offer document from the offeror and a target company statement from the target company. In respect of an acquisition or allotment of shares, code company shareholders receive a notice of meeting prepared by the target company. Both target company statements and notices of meeting are required to contain or be accompanied by a recommendation on the offer or proposed transaction from the directors of the target company and a report from an independent adviser on the merits of the offer or proposed transaction.

20.

Securities in the code company cannot be compulsorily acquired unless a person³ becomes the holder or controller of at least 90% of the voting rights in the code company⁴ . The compulsory acquisition provisions of the Code allow a person who has reached the 90% threshold to squeeze out the minorities and gives the minorities the right to require the purchase of their shares. The compulsory acquisition threshold serves to establish a level which must be reached before shareholders can be compelled to sell their shares.

21.

The provisions of the Code are intended to provide shareholders of a code company with special rights and protections in respect of their shareholdings. Common to all code transactions (whether code offers, acquisitions or allotments) the Code requires that:

Shareholders are all treated equally and have the opportunity to participate in any change of control. The transaction cannot proceed without the support of a specified level of shareholders;
Shareholders have sufficient information, including an independent adviser's report, to enable them to consider the merits of the proposed transaction;
Securities in the code company cannot be compulsorily acquired until a person⁵ becomes the holder or controller of 90% of the voting rights in the code company.

22.

The Code is intended to provide these rights and protections for code company shareholders regardless of the mechanism utilised to effect a change of control.

23.

By contrast, the scheme of arrangement and amalgamation mechanisms provided under the Companies Act do not provide the same rights and protections for code company shareholders. However, they can be utilised to effect a merger or acquisition involving a change of control of a code company.

24.

We set out briefly below the provisions of the Companies Act relating to amalgamations and schemes of arrangement and outline the relationship of these provisions with the Code.

AMALGAMATIONS UNDER PART XIII OF THE COMPANIES ACT

25.

Under Part XIII of the Companies Act two or more companies may amalgamate and continue as one company, which may be one of the amalgamating companies or a new company, if:

(a): the amalgamation proposal is approved by shareholders representing 75% of the voting rights voted at a meeting of shareholders of each amalgamating company⁶ ; and
(b): the board of each amalgamating company resolves that in its opinion the amalgamation is in the best interests of the company and it is satisfied on reasonable grounds that the amalgamated company will satisfy the solvency test contained in the Companies Act⁷ .

26.

Amalgamations under Part XIII are not limited to situations where two or more companies merge and the shareholders of the merging companies continue as shareholders of the amalgamated entity. The amalgamation provisions also anticipate amalgamations where the two companies amalgamate but the shareholders of one entity receive cash consideration from the other entity or have a cash alternative for their shares in an amalgamating company⁸.

27.

Neither the Code nor the Companies Act excludes the provisions of the Code to changes of control of code companies resulting from an amalgamation under Part XIII of the Companies Act.

28.

Accordingly, if an amalgamation results in a person becoming the holder or controller of voting rights in a code company the fundamental rule will apply and the parties will need to consider whether they can utilise one of the mechanisms in rule 7 of the Code. Some amalgamations which involve the allotment or acquisition of shares by a person can be approved by shareholders in accordance with rule 7(c) or 7(d)⁹.

29.

However, amalgamations can be structured to avoid the Code.

30.

If two companies are amalgamated and one is a code company the amalgamation can be structured so that the code company will be extinguished as a legal entity and the shareholders will become holders of shares in an entity that is not a code company. In these circumstances at no stage in the amalgamation process will any person actually obtain or control shares in the code company. Accordingly, even though such amalgamation transactions may have the same ultimate result as a takeover offer under the Code they will not have any Code consequences. Parties merging with a code company in this way will not need to comply with the requirements of the Code.

31.

An example of an amalgamation structured in this manner was the recent amalgamation of Waste Management New Zealand Limited and Transpacific Industries Group Limited. Waste Management was a code company and the amalgamation was structured so that Waste Management was amalgamated into Transpacific (i.e. Waste Management would no longer exist). Waste Management shareholders received cash consideration in return for their shares. The Code did not apply to the transaction as the amalgamation did not result in Transpacific becoming the holder or controller of any Waste Management voting rights as that company went out of existence.

32.

The Waste Management case is a clear example of a change of control of a code company being effected in a manner which completely avoids the various protections for shareholders contained in the Code.

33.

Dissenting shareholders in respect of an amalgamation under Part XIII of the Companies Act have a minority buy-out right under section 110 of the Companies Act. This right is only available to shareholders who cast an opposing vote at the relevant shareholder meeting. Under the Code all shareholders in a code company can require to be bought out if a person becomes the dominant owner of the company but this right is only triggered when a person¹⁰ becomes the holder or controller of at least 90% of the voting rights in the code company.

34.

Like shareholders considering a code transaction, shareholders considering an amalgamation proposal must be provided with a document setting out the terms of the proposed transaction. Part XIII of the Companies Act sets out a list of specified information that must be included in the proposal. Part XIII also requires that the shareholders in the amalgamating companies must receive information about the constitution of the amalgamated company, minority buy-out rights and the material interests of directors in the proposal.

35.

There is no requirement in the Companies Act that shareholders receive a report on the merits of a proposed amalgamation from an independent adviser. An independent appraisal report may be required by the Listing Rules if the relevant code company is a party to a listing agreement with the New Zealand Exchange Limited. Some companies proposing an amalgamation voluntarily obtain some form of appraisal report for shareholders.

Footnotes

1: See rule 7(c) and 7(d) of the Code.
2: See rule 17 of the Code.
3: Or two or more persons acting jointly or in concert
4: The corollary of this requirement is that a person holding more than 10% of the shares of the code company can block the compulsory acquisition provisions.
5: Or two or more persons acting jointly or in concert
6: sections 221(5) and 106 of the Companies Act
7: section 221(1) of the Companies Act.
8: Section 220(1) of the Companies Act states that an amalgamation proposal must set out the terms of an amalgamation and specified matters in particular, including "if shares of an amalgamating company are not to be converted into shares of the amalgamated company, the consideration that the holders of those shares are to receive instead of shares of the amalgamated company".
9: This was the case in a merger transaction undertaken by Wakefield Health Limited and Royston Hospital Limited in 2005. An allotment was to be made by one of the merging companies, a code company, to a major shareholder of the other company. The parties sought the approval of non-associated shareholders of the allotting company to the allotment under rule 7(d) of the Code.
10: or two or more persons acting jointly or in concert

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