The Panel first made comments to the market on the relationship between the Code and the reconstruction provisions of the Companies Act in the context of reviewing its policy on exemptions in relation to schemes of arrangement. In April this year the Panel issued a discussion paper on proposed changes to its policy on exemptions regarding schemes of arrangement¹⁶ which discussed the practice of some companies using technical devices in the structuring of the scheme so as to avoid the jurisdiction of the Code.

As well as asking for comments on proposed changes to its exemption policy regarding schemes, the paper discussed the use of schemes as devices to avoid the Code. The paper asked respondents to address the following questions:

• Is the status quo, i.e. that participants in schemes of arrangement must comply with the Code, appropriate?
• Are the devices being adopted by some companies to exclude certain aspect of schemes of arrangement from the Code's jurisdiction an appropriate use of the Court supervised scheme of arrangement process?
• Should the Court take into account the principles of the Code and the amalgamation provisions of the Companies Act in approving schemes of arrangement?

Copies of the submissions received in response to the paper regarding exemptions for schemes are attached (Appendix B).

The Panel received comments from a number of market participants concerned about the relationship between the Code and the use of schemes and amalgamations in respect of code companies. The Panel's paper was released shortly after the Waste Management transaction was announced and it appears that concerns regarding that transaction led some respondents to comment of the Panel's paper.

A number of market participants could not understand why a transaction which looked like a takeover and had the same effect as a takeover could be carried out under the amalgamation or scheme provisions of the Companies Act. Concern was expressed that under the amalgamation Waste Management shares were in effect being compulsorily acquired for cash consideration by Transpacific on the basis of a special resolution of Waste Management shareholders, rather than Transpacific having to first become the holder or controller of 90% of the voting rights in Waste Management.

Some parties suggested to the Panel that the ability to use an amalgamation or a scheme to avoid the Code is a loophole in the Code which needs to be addressed. They suggested that if this loophole is not addressed the integrity of the New Zealand market and the confidence of the investors will suffer.

However, this was not a universal opinion. Some market participants advised the Panel that in their view the legislature intended that schemes and amalgamations be completely separate mechanisms from code transactions and that the Code is not intended to apply in respect of these mechanisms. In their view Part XIII and Part XV provide protections for shareholders, in the form of minority buy-out rights and Court approval respectively, and the legislature intended that these protections on their own are sufficient in respect of reconstructions under the Companies Act. Market participants expressing this view considered that if the legislature had intended that Code principles should be taken into account by the Court in considering schemes of arrangement then Part XV would have been amended to require this when the Code was introduced.

Having considered its own experience regarding schemes and amalgamations involving code companies and the submissions received on its paper on exemptions for schemes, the Panel decided that the issues regarding the inconsistencies inherent in the use of amalgamations and schemes to effect mergers or acquisitions involving code companies outside the jurisdiction of the Code needed to be addressed.

The first step for the Panel was to consider what steps it could take to address these issues within the provisions of the Code and the Companies Act.

The Panel decided that to address the use of schemes as devices to avoid the rights and protections of the Code it would:

• seek to be heard by the High Court when the Court considers proposed schemes of arrangement involving code companies in the future; and
• revoke the class exemption for initial public offers which had been relied upon in respect of some schemes of arrangement to effect a merger by creation of a new company.

The Panel's reasons for seeking to be heard by the Court in respect of future schemes of arrangement and revoking the class exemption are set out in the Panel's press release in respect of these matters, dated 15 May 2006, attached as Appendix C.

These measures are the only course of action available to the Panel under the current legislative framework of the Code and the reconstruction provisions of the Companies Act. Clearly these measures would not be a sufficient solution to the problems which some market participants urged the Panel to address:

• These measures would not address the problems relating to amalgamations involving code companies which are framed in such a way that they are outside the jurisdiction of the Code, as the Court is not involved in such a process.
• Seeking to make submissions to the Court will not necessarily result in the provisions of the Code being taken into account in respect of proposed schemes. The Panel has no formal standing in respect of applications to the Court regarding schemes of arrangement and the Court has no statutory direction regarding its treatment of such submissions. The Panel has not yet had the opportunity to make any submissions to the Court regarding a proposed scheme of arrangement. It is uncertain what weight the Courts would give to such submissions or indeed if they will hear the Panel.

The Panel considers that if the issues regarding the inconsistencies inherent in the use of amalgamations and schemes of arrangement to effect a merger with, or acquisition of, a code company outside of the jurisdiction of the Code are to be addressed satisfactorily this will require some form of amendment to the Code and the Companies Act.

The Panel decided that before making recommendations to the Minister on what it considers are desirable changes to the law, it should seek market comment on issues arising from the use of schemes and amalgamations in respect of code companies and possible solutions to problems arising from the use of schemes.