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4. OPTIONS

95. There appear to be five principal alternatives to the option of maintaining the status quo, to address the problems arising from the use of the reconstruction provisions to effect changes in control of Code companies. These are discussed below.
96. These options are intended to generate discussion and to assist in reaching conclusions on the way forward. The Panel encourages readers to put forward their own variations or alternatives to the options canvassed here.

Outline of the options

Option 1 Anti-avoidance provisions inserted into reconstruction provisions

97. Under this option the Companies Act would be amended to bring the use of the reconstruction provisions, where Code companies are involved, more into alignment with the position in Australia. This could involve the following matters:
    1. an anti-avoidance provision would be inserted into each of Parts 13 and 15 of the Companies Act, to the effect that that Part of the Companies Act could not be used if a Code company was involved in the amalgamation or scheme and the amalgamation or scheme had been proposed to avoid the Code;
    2. Under the Part 15 provision, the Court would not be able to approve a scheme unless the Court was satisfied that the scheme had not been proposed to avoid the Code, or unless the Panel had provided a "no-objection" statement.⁸ A similar "no-objection" statement could also be a prerequisite for an amalgamation under Part 13 of the Companies Act;
    3. The Australian requirements also include that the scheme must be approved by shareholders in each class representing 75% of the shares that are voted as well as by more than 50% in number of those voting. The Panel has had strong views expressed to it, in the context of exemption applications, against a 50% by number threshold because of the disproportionate power that can give to minority shareholders. It might therefore be more appropriate in the New Zealand context for an amalgamation under Part 13 or a scheme under Part 15 to either:
       • mandate the voting requirements as being approval by 75% of the votes of those voting and by 50% of total voting rights, of each of the companies involved; or
       • leave the position as it is currently, whereby the common law is applied by the Court for the voting threshold (i.e., approval by 75% of the votes of those voting).
    4. The question as to whether "interested shareholders", i.e., the promoters of the scheme and their associates, should be required to vote in a separate class from other shareholders (as occurs in Australia) could be left to the current common law position, under which shareholders with sufficiently different interests must be constituted as separate classes and vote at separate meetings (see, e.g., Re National Dairy Association of New Zealand Limited [1987] 2 NZLR 607; Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, etc).⁹
98. It is also proposed that:
    1. the responsibilities of the Ministry of Economic Development could be expanded to provide for the investigation of complaints about compliance with the provisions of the Companies Act relating to amalgamations and schemes; and
    2. the Panel's statutory functions would be explicitly expanded to enable it to investigate complaints about schemes and amalgamations where Code companies are involved. The Panel would report to the Courts at the time that initial or final orders are being considered for schemes.

Option 2: Statutory exemption from Code

99. A second alternative would be to amend the Takeovers Act and the Code to exempt schemes and amalgamations involving a Code company from the Code. At the same time the Companies Act would be amended so that the Panel was involved in the processes as described under Option 1. A carve-out of this nature would provide greater legal certainty, unlike Option 1 which still leaves the Code applying to some schemes and amalgamations involving Code companies.
100. As under Option 1, the responsibilities of the Ministry of Economic Development and the Panel would be expanded to become proactive in investigating complaints about schemes and amalgamations in relation to compliance with the requirements of the Companies Act, particularly where Code companies are involved.

Option 3: Align Companies Act's thresholds and disclosures with the Code

101. A third type of solution would be to amend the reconstruction provisions of the Companies Act so that:
     1. shareholder approval thresholds in respect of schemes and amalgamations are specified in the Companies Act and are consistent with the requirements of the Code, where Code companies are involved, for similar changes of control
     2. any scheme or amalgamation proposal involving the change of control of a Code company provided to shareholders must contain the same information as would be provided in respect of a Code offer with a similar outcome.
102. In making the alignment there are issues of interpretation to decide. These include the degree of shareholder approval necessary (appropriate approval thresholds) and coverage (which shareholders, if any, should not be eligible to vote on any particular resolutions.)
103. The differences between the processes being brought together means there are several practical ways of interpreting the aim of this type of solution.

Approval thresholds

104. Currently schemes and amalgamations are approved (by law, or by Court order) by 75% of voting rights of shareholders eligible to vote and voting at a meeting (or by proxy) of the company. The Code has an approval level of more than 50% of total votes for a takeover offeror to be able to take up the shares accepted into the offer, and 90% of total voting rights to have the right to compulsorily acquire all outstanding shares.
105. All schemes and amalgamations involve "compulsory acquisition" because once a scheme or amalgamation is approved all the shares of the amalgamating companies are "acquired" (in practice cancelled) and the former shareholders will receive shares in the surviving (amalgamated) company, other securities, and/or cash depending on the nature of the scheme or amalgamation. These different forms of outcome can be seen as falling differently under the Code, and so may require separate treatment.

Voting eligibility

106. The Companies Act does not prescribe eligibility to vote on scheme or amalgamation proposals although Courts may do for schemes of arrangement where different classes of interested person are involved. The Code, where shareholder votes are involved, generally precludes the involvement of both direct transaction participants and their associates.
107. The Code's associate and involvement rules do not work as an analogy for a scheme or amalgamation because under the reconstruction provisions all shareholders are involved. That involvement would preclude them from a rule 7(c) or 7(d) vote under the Code. So the Code's rules around voting eligibility cannot simply be transcribed into Parts 13 and 15 of the Companies Act.
108. One possibility would be to exclude from voting on a scheme or amalgamation the voting rights attached to shares held by parties associated with the formulation and promotion of the proposal, likely to be the largest shareholders. To be consistent with Companies Act philosophy this could be a requirement for approval (at more than 50% of those voting, that is, by ordinary resolution) of the proposal by the remaining, and therefore non-interested, shareholders.
109. Pulling these two issues (of voting thresholds and shareholder information) together suggests six sub-options. That is, the following three options could be with or without separate approval by ordinary resolution of non-interested shareholders. All six sub-options would include a requirement that the scheme or amalgamation proposal provided to shareholders must contain the same information as would be provided in respect of a Code offer.

Information disclosure

110. The information that would be required to be provided to shareholders, in addition to the broad requirements contained in Parts 13 and 15 of the Companies Act, would include:
     1. an independent report for shareholders on the merits of the transaction, to be prepared by an independent adviser approved by the Panel
     2. disclosure of key assumptions used in the valuation of any asset or prospective financial information about the target company
     3. disclosure about which shareholders have already agreed to vote in favour of the proposal, the material terms of the agreement, and details of the ownership of equity securities in the amalgamating companies by the directors of the companies involved in the proposal and by all substantial security holders of the companies involved in the proposal (i.e., by those holding or controlling 5% or more of the shares)
     4. disclosure about the persons involved in the formulation of the proposal, and their and their associates' ownership of voting securities in any of the companies involved in the proposal
     5. for an amalgamation or scheme with the type of transaction described in paragraph 113(b) below, a statement of the general nature of any material changes likely to be made to the business activities of the amalgamated company and its subsidiaries, if the proposal is approved by shareholders.

Option 3A Approval level set at 50% of voting rights

111. For the approval threshold to be universal, and consistent with the Code's requirement for control, an appropriate approval threshold could be a positive vote representing more than 50% of total voting rights of the target company.

Option 3B Approval level set at 75% of voting rights

112. Approval by Option 3A's 50% of total voting rights, for what is effectively a compulsory acquisition, might be considered too light, while a requirement for approval by 90% of total voting rights might be considered impossible to achieve. Therefore, a median-ranged percentage, such as 75% of total voting rights, might be considered the most appropriate equivalence to the Code thresholds.

Option 3C Approval level set by type of takeover

113. If the approval thresholds were to be tailored to the particular type of transaction, and prescribed in law, the following gradations in approval levels might be appropriate (in conjunction with a special resolution of each company):
     1. for a full cash takeover, or where scrip is being provided as consideration and the target company shareholders become very minor shareholders in the bidding company, by a 90% majority of total voting rights of the target company
     2. for a merger of shareholders, where the shareholders in the participating companies will end up with a control influence in the continuing company roughly proportionate (taking account of the dilutionary effects of the amalgamation) to their former position in the amalgamating companies, a 50% majority of total voting rights, for each of the companies involved in the proposal
     3. for a reconstruction involving no or minimal change in effective control, no special voting requirements other than the usual special resolution.
114. Selecting the appropriate alternatives, especially in complex transactions, would involve value judgements, and thus some authoritative exercise of discretion to determine which category a proposal should fall into. A mechanism (such as the Court's discretion, the Panel's discretion, or some other body's discretion) would be required to fill this role.

Option 4: Prohibit Part 13 amalgamations in respect of Code companies

115. A fourth alternative would be to amend the reconstruction provisions of the Companies Act so that amalgamations under Part 13 of the Companies Act cannot be undertaken at all if a Code company is involved. This would move the statutory regime in New Zealand closer to that in Australia, where amalgamations cannot be used for mergers involving Code companies.
116. Schemes would be available where changes of control of Code companies are involved. Therefore, this option could be implemented in conjunction with either Option One or Option Three in respect of schemes.
117. It would mean that if bidders wish to achieve a change of control of a Code company by takeover they would have to use the mechanisms under the Code or the scheme mechanism under Part 15 of the Companies Act (as amended for Option 1, to ensure that shareholders would not be disadvantaged by the use of a scheme instead of a takeover made under the Code).

Option 5: Prohibit schemes and amalgamations in respect of Code companies

118. A final alternative considered here would be to amend the reconstruction provisions of the Companies Act so that neither amalgamations nor schemes of arrangement under Parts 13 or 15 of the Companies Act could be used with Code companies except with the permission of the Panel in circumstances where the use of the reconstruction provisions was clearly warranted.
119. It would mean that if bidders wish to achieve a change of control of a Code company they could only use the takeover mechanisms under the Code, unless otherwise permitted by the Panel.

Postscript to consideration of options

120. One other matter, in respect of which the Panel would like the market's view, is the appropriateness of the Code's 90% compulsory acquisition threshold. Has it created the incentive for companies to utilise the Companies Act reconstruction provisions instead of the Code for control-change transactions because 90% is considered too hard to achieve or unreasonable? The Panel would like to test the idea as to whether reducing the Code's compulsory acquisition threshold would encourage greater use of Code takeovers.
121. Would it be sensible to lower the Code's compulsory acquisition threshold to:
     1. 85% of total voting rights in the Code company?
     2. 80% of total voting rights in the Code company?
     3. 75% of total voting rights in the Code company?
122. The Panel is not proposing this as an alternative option to the options set out above. But it would like market participants' views as to whether a reduction in the Code's compulsory acquisition threshold could improve (or harm) the effectiveness of the Code.

Footnotes

8. The Panel would develop and publish policies regarding how parties would obtain a no objection-statement from the Panel, much as ASIC has done in Australia - see footnotes 4 and 5, above.
9. However, this would not deal with the issue of classes of interests in relation to voting on Part 13 amalgamations. For that reason, and because of the difficulties of ensuring compliance with the proposed anti-avoidance provision, Option 1 would probably function optimally in conjunction with Option 4.