INTRODUCTION

1. On 27 March 2007 the Minister of Commerce asked the Panel to advise her on the issue of amalgamations and schemes of arrangement under the Companies Act 1993 (the "reconstruction provisions") involving companies that fall under the Takeovers Code. This followed the Panel's June 2006 discussion paper on the matter, and the Panel's subsequent recommendations to the Minister and to the Commerce Committee which was considering the 2006 Business Law Reform Bill.
2. In response to the Minister's request the Panel issued a new discussion paper on 5 December 2007 to seek the market's views on the Panel's assessment of the issue and on the merits of the proposals outlined in the paper ("the 2007 discussion paper"). Submissions were requested by 15 February 2008.
3. The Panel received 16 submissions on the 2007 discussion paper. Feedback has been used to assist the Panel to settle on a preferred option to deal with the cross-over between the reconstruction provisions and the provisions of the Code.
4. On 16 May 2008 the Panel recommended to the Minister the changes to the law that are discussed in this Explanatory Memorandum.

EXECUTIVE SUMMARY

5. In a change of control involving a Code company the bidder, and some shareholders in, and the Board of, the target company can, and sometimes do, structure takeover bids in such a way that the Code will not apply to the transaction, using provisions in the Companies Act.
6. There is a concern, expressed by some market participants and commentators and shared by the Panel, about how this might affect shareholders and the integrity and competitiveness of the New Zealand capital market.
7. While the Panel accepts that schemes and amalgamations are appropriate and necessary vehicles for carrying out some company reconstructions and mergers (with proper safeguards for shareholders) the current situation where the Code can be avoided (and the consequent loss of the express protections extended by the Code) through the way a deal is structured is of concern to the Panel. This is the same concern recognised in other 'code' jurisdictions which expressly provide regulatory overview of schemes that are used to effect changes of control of companies that are subject to a takeovers code.
8. The Panel's 2007 discussion paper proposed the following options for changing the status quo:
   1. Option 1 - Court approval required for amalgamations and schemes, with Panel input.
   2. Option 2 - Statutory exemption from Code.
   3. Option 3 - Align Companies Act's thresholds and disclosures with the Code.
   4. Option 4 - Prohibit Part 13 amalgamations in respect of Code companies.
   5. Option 5 - Prohibit schemes and amalgamations in respect of Code companies, unless the Panel permitted their use.
9. After careful analysis and consideration of the feedback received in response to the 2007 discussion paper, and further research, the Panel's preferred option is a combination of Options 1, 2 and 4 (with some refinements) from the 2007 discussion paper. The Panel's preferred option is that the Companies Act 1993 would be amended so that:
   1. A provision is inserted into Part 15 (Schemes of Arrangement), under which the Court would be prevented from approving a scheme that would have any effect on the voting rights of a Code company unless;
      • the Court is satisfied that the shareholders of any such Code company would not be adversely affected by the transaction not being undertaken under the Takeovers Code, or
      • there is produced to the Court a statement in writing by the Panel stating that the Panel has no objection to the scheme of arrangement.
      However, the Court need not approve a scheme even though a statement by the Panel, stating that the Panel has no objection to the scheme, has been produced to the Court.¹
   2. Voting thresholds, for the shareholder resolutions to approve of the scheme are stipulated, so that for the resolution to be passed -
      1. Those voting in favour represent 75% of the votes cast on the resolution at each meeting of shareholders (see (c) below);
      2. Those voting in favour represent a majority of the shares eligible to be voted (i.e., more than 50% of total voting rights of the company); and
   3. The voting threshold in sub-paragraph (i) above must be obtained at each meeting of each group of shareholders (as determined by the Court under section 236(2)(b) of the Companies Act as being an interest class for the purposes of voting on the resolution);
   4. Guidance for the Court should be included in Part 15 of the Companies Act on how to determine interest classes, for example by codifying the principles of the common law for determining those classes;
   5. The use of the Companies Act Part 13 long form amalgamation, under section 221, should be prohibited where an amalgamating company is a Code company, but the availability of the short form amalgamation under section 222 should be preserved for all companies.²
10. The Panel also proposes that the Takeovers Act and the Code should be amended to provide a statutory exemption from the application of the Code where Code companies are involved in a scheme of arrangement under Part 15 of the Companies Act if the Panel has provided a "no-objection" statement for production to the Court.
11. The Panel will develop and publish information about the criteria it would apply for the giving of a "no-objection" statement. Although the policy development on these criteria is yet to be undertaken, they are expected to include the following:
    • the information proposed to be given to shareholders must meet disclosure standards similar to those required by the Code (including an independent adviser's report prepared by an adviser approved by the Panel); and
    • any interest classes amongst the shareholders must be satisfactorily identified in accordance with the guidance on determining interest classes that will be included in Part 15 of the Companies Act (see paragraph 9(d), above,) for the purposes of shareholders voting on the scheme.
12. The Panel will also publish guidance for the market on the timing of the giving of "no-objection" statements vis-à-vis the Court processes for schemes, on how to obtain a "no-objection" statement, and on any fees for making "no-objection" statement applications. Promoters of the scheme would be encouraged to liaise closely with the Panel over these issues before applying to the Court for initial orders for the scheme.
13. In order to ensure that the preferred option is effective and efficient in practice, it is hoped that a wide range of interested parties will participate fully during the Select Committee process, after the Bill is introduced into the House.

Footnotes

1. This proposal is similar to that found in section 411(17) of the Australian Corporations Act 2001 (Cth), which provides that:
   (17) The Court must not approve a compromise or arrangement under this section unless:
   1. it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 [i.e., the takeovers provisions]; or
   2. there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;
      but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b).
2. Section 222 amalgamations relate solely to reorganisations of wholly owned subsidiaries. For Code companies wishing to be involved in an amalgamation not covered by section 222, this could still be achieved under the scheme of arrangement procedure; see paragraphs 67 - 70 below.