Based on its own experience and the submissions made in respect to the Panel's paper on its policy for exemptions for schemes of arrangement the Panel prepared a discussion paper on schemes and amalgamations involving code companies¹⁷. The paper was issued on 19 June 2006.

The discussion paper sought general comments on:

• the relationship between the Code and the reconstruction provisions of the Companies Act;
• suggested amendments to the Code and the Companies Act in relation to the use of schemes and amalgamations in respect of code companies.

We discuss separately below the responses received on the general relationship between the Code and the Companies Act and the responses received on the suggested amendments to the Code and the Companies Act.

The discussion paper asked respondents to address the following general questions about the relationship between the Code and the reconstruction provisions of the Companies Act:

• Is it appropriate that mechanisms for changes of control which achieve the same result and have the same effect on shareholders of code companies should provide shareholders with comparable rights and protections?
• Do you consider that schemes and amalgamations should be completely separate mechanisms from code transactions and that the Code should not apply in respect of those mechanisms?
  
  OR
  
  
• Do you consider that the Panel should recommend some form of amendment to the Code and the reconstruction provisions of the Companies Act to address issues arising from the use of schemes of arrangement and amalgamations outside of the jurisdiction of the Code to effect mergers with or acquisitions of code companies?

The Panel received submissions in response to its discussion paper from the following respondents:

(a)

ABN AMRO Craigs;

(b)

Brian Wheeler BComm, ACA (retired);

(c)

New Zealand Law Society (Commercial and Business Law Committee);

(d)

Simpson Grierson;

(e)

Grant Samuel & Associates;

(f)

New Zealand Exchange Limited ("NZX");

(g)

Harmos Horton Lusk;

(h)

Paul Ridley-Smith, Morrison & Co;

(i)

Bell Gully;

(j)

Cameron Partners;

(k)

Chapman Tripp Sheffield Young.

The submissions are attached as Appendix E.

Most submissions received recognised the need for an alternative transaction structure to a code offer to be available in some circumstances. However, there were mixed responses as to whether the current relationship between the Code and the reconstruction provisions of the Companies Act is appropriate.

Of the eleven submissions received six were broadly of the view that all structures achieving the same type of result for the shareholders of code companies should be subject to the same threshold requirements and have the same protections for minority shareholders. These submissions indicated a desire for consistency as to the rights and protections shareholders have in respect of any change of control regardless of the mechanism utilised by the companies concerned. These six submissions were broadly in favour of some form of legislative change to achieve this. One submission from Paul Ridley-Smith stated that:

"Legislative change is required to make substantially neutral, in-so-far as the application of the Code's objectives and principles, the choice of schemes of arrangement, amalgamations and takeover offers".

The submission of the New Zealand Exchange stated:

"We believe the mechanisms for changes of control which achieve the same result and have the same effect on shareholders should provide comparable rights and protections to shareholders. Presently the opportunity exists for market participants to arbitrage between different regulatory regimes where those two regimes are designed to effect the same outcome. NZX agrees that this arbitrage opportunity needs to be closed. We do not consider that differing regimes for changes of control should permit different treatment in the following essential areas:

• Information provided to shareholders;
• Voting thresholds and voting restrictions;
• Compulsory acquisition levels.

ABN Amro Craigs suggested that if there are compelling reasons for the proposed amalgamation or merger then the parties proposing these should be comfortable with providing the same protections that minority shareholders enjoy under the Code.

Once again the view that there should be consistency as to the protections available to code company shareholders in respect of Code transactions, schemes and amalgamations was not universal.

Four of the eleven submissions received on the Panel's discussion paper suggested that schemes and arrangements are intended to be treated differently from Code transactions.

These submissions stated that it is not correct to regard the protections contained in the Code as "superior" to those that exist under the amalgamation and scheme provisions in the Companies Act. The submissions noted that the Companies Act provides different protections for shareholders in respect of amalgamations and schemes which are designed to reflect the different range of transactions that they cover. These respondents suggest that although these protections are not identical to those which apply in respect of Code transactions, they are not intended to be. They say that they are sufficient and appropriate in respect of the types of transactions carried out by way of a scheme or amalgamation.

Some respondents also stated that the Companies Act provisions contain important protections in respect of schemes and amalgamations which are not necessarily present in takeovers under the Code. In particular they noted the following:

(a)

Amalgamations and schemes require the active support of the directors of the code company involved in the amalgamation or scheme;

(b)

Amalgamations and, generally, schemes, require the approval of 75% of shareholders voting at a meeting. Under the Code increases in voting rights which may affect control can in some circumstances be effected with a vote of only a majority of shareholders voting at a meeting;

(c)

Schemes require the approval of the Court, which reviews the transaction carefully to determine whether it is in the interests of all affected parties, including shareholders. There is no equivalent role played by the Panel under a takeover and the Panel has no duty or function to review the substance of a takeover on behalf of shareholders;

(d)

In respect of an amalgamation under Part XIII of the Companies Act dissenting shareholders have minority buy-out rights i.e. the right to have their shares acquired at a fair value. There is no equivalent provision under the Code. While the Code has a compulsory acquisition regime applying when a shareholder holds or controls 90% of the voting rights, such a level of control is not required in order for minority buy-out rights to be available in respect of an amalgamation.

It was suggested that the Panel is overreacting to possible difficulties arising in respect of the use of schemes and amalgamations in respect of code companies as in the five years since the Code was introduced only three transactions appear to have been structured as schemes or amalgamations to avoid the provisions of the Code.

However, of the four submissions which stated that schemes and amalgamations are intended to be treated differently from Code transactions, two submissions expressed the view that there may be arguments to prevent the use of schemes or amalgamations where a transaction is being structured for the sole purpose of avoiding the operation of the Code in a way that prejudices shareholders.