CONSULTATION

105. The Panel published its discussion document on 5 December 2007. Submissions closed on the 15th February 2008. The Panel received 16 submissions in all. Seven of these were from major law firms in New Zealand that offer advice on takeover activity. Three submissions were received from investment advisers/financial services providers; one was from an investment banker, and one from a valuer that undertakes independent adviser reports under the Takeovers Code and NZX Listing Rules. Submissions were also received from an individual investor, the New Zealand Shareholders Association, NZX and the New Zealand Law Society (NZLS).

Problem definition

106. In answer to the questions in the discussion document relating to whether there is a problem that requires fixing, approximately half the respondents agreed there is a problem while the other half, including six of the seven law firms, disagreed that there is a problem.
107. Approximately one third of the respondents suggested that the use of the Companies Act reconstruction provisions to effect changes of control of Code companies is likely to become more frequent under the status quo. One third disagreed that they would become more frequent and of these, three of the six law firms that preferred the status quo were represented. The other third of respondents, including the other three law firms that preferred the status quo to be maintained, did not comment on this question.
108. Just over a third of the respondents believed that the consequences for shareholders and for market integrity of the use of the reconstruction provisions where Code companies are involved were negatively significant. Just under one third (including three of the six law firms that preferred the status quo to be maintained) believed there were no negative or significant consequences from maintaining the status quo. One of those three law firms believed there were significant positive consequences from maintaining the status quo, in terms of the certainty for the market both nationally and internationally available under the reconstruction provisions of the Companies Act.³⁰
109. Four of the 16 respondents suggested that the information disclosed to shareholders under the three regimes was materially different, with the Code providing better information for shareholders. One of these (the independent adviser) commented that when, under a scheme or amalgamation, a report is provided for shareholders, the lack of prescribed rules about the report creates scope for influence to be exerted on the adviser, by the promoters, as to the content of the report. Six of the 16 respondents submitted that, in practice, there was no material difference between the level of information provided to shareholders under the various regimes. The others provided no comment.
110. Eleven of the respondents commented on the question of whether the rights and protections of the Code should apply to all changes of control of Code companies. Three of those respondents completely agreed with that proposal. Two respondents favoured shoring up the reconstruction provisions of the Companies Act with Takeovers Code rights and protections. They focused on the information to be given to shareholders under schemes and amalgamations and one of those two respondents also suggested that the Code's rules should apply to schemes and amalgamations in relation to voting thresholds and voting restrictions, and in respect of compulsory acquisition levels (i.e. 90% acceptance, as under the Code). Five of the six respondents who disagreed that the rights and protections of the Code should apply to all changes of control involving Code companies were adamant that the status quo should be maintained, while one of these six respondents preferred that the rights and protections of the Code be applied where the reconstruction provisions were used to undertake what is clearly a takeover (the example was given of the Waste Management takeover by TransPacific).

Policy objectives

111. All of the respondents either generally agreed with the policy objectives used in the discussion document or made no comment on them (ten clearly indicated that the objectives were appropriate). In relation to the question asking whether other objectives should be included for assessing the options, respondents largely made no comment or indicated that no other objectives were necessary. However, three of the respondents suggested additional policy considerations that could be applied, including the following: freedom of contract, integrity of company governance, avoiding the rewarding of shareholder apathy towards voting, flexibility for the mechanisms available for undertaking changes of control of companies, and shareholder information.
112. In response to the question asking whether some objectives are more important than others, respondents generally made no comments. However, three submitters ranked allocative efficiency and promoting competition for control of Code companies in either first or second place for importance. One of those three respondents ranked international competitiveness as the second most important objective and two of the three ranked fair treatment of shareholders as the third most important objective.

Options

113. In response to the question as to whether there were any other options the Panel should consider, seven of the respondents made no significant comments. One respondent said no other options needed to be considered. Five of the respondents preferred that the status quo be maintained (three of these were law firms, one an investment banker and one an investment adviser), and one of these respondents suggested including legislative guidance on the class interest provisions where shareholders vote under the Companies Act.
114. One respondent suggested aligning the Companies Act information requirements with those of the Takeovers Code and also suggested that there be a dedicated regulator to provide oversight of changes of control occurring under the Companies Act. One of the respondents suggested that a modified version of Option 5 should be considered, under which the Panel would have to give its approval for a scheme or amalgamation to be undertaken where a Code company was involved, requiring the same information standard as for a takeover and setting out in the Code the process for the giving of the Panel's approval.
115. One of the law firm respondents suggested that the Court's jurisdiction for approving schemes of arrangement under Part 15 of the Companies Act could be elaborated to require approval thresholds by a stated majority of disinterested shareholders and confirming that arrangements for dissentient shareholders include minority buy-out provisions similar to those available under Part 13 of the Companies Act. The Court would set what the appropriate threshold would be for approval, under the circumstances. This respondent also suggested that there was no empirical evidence that the Courts have made the wrong decision to date in approving a scheme.³¹
116. In response to the question as to whether the respondents agreed with the Panel's assessment of the impact of the options, four respondents clearly disagreed with the Panel's assessment and argued that the status quo should be maintained. Five of the respondents partially agreed with the Panel's assessment. One of those, however, also suggested that the status quo should be maintained. Another suggested that MED's responsibilities should not be expanded, and, when considering imposing restrictions on voting rights, the requirement to vote in interest classes should be given greater attention rather than disenfranchising certain shareholders. Several respondents also indicated that, particularly if Option 1 in the discussion paper were chosen, clearly identifying interest classes would be necessary. One of these respondents (NZX) also suggested avoiding multiple regulators, and preferred the ability for the Panel to provide a no objection statement as proposed under Option 1.
117. An investment adviser, which was also in partial agreement with the Panel's assessment of the impact of the options, suggested that if Option 1 were chosen there should not be an additional requirement for approval by more than 50% of the total voting rights of the Code company. The concern was that of shareholder apathy.
118. Two respondents clearly agreed with the Panel's assessment. However, one of these, a law firm, reiterated that the status quo should be maintained. Four respondents gave no comment on this question.
119. In response to the question regarding which option was preferred, one respondent made no comment. Of the other 15 respondents, many indicated a "preference" for more than one option and it is not possible to highlight any one of the options as having anything like overall agreement.
120. Of these 15 respondents, seven suggested that the status quo should be maintained. Four of these were law firms, one an investment banker and two investment advisers. Of the investment advisers, one appeared to agree with any of the options but Option 2.
121. Option 1 received no outright acceptance by any respondents; however, two of the respondents suggested a combination of features from Option 1 and Option 5. Three respondents (apart from the two just mentioned) suggested Option 1 as a preferred option but also listed several other possible options as being preferred.
122. Option 2 received no agreement from any of the respondents. Two respondents preferred Option 4. Of the eight respondents indicating that Option 5 would be preferred, two have already been noted above in respect of preferring a combination of Option 5 and Option 1, one respondent, the New Zealand Shareholders Association, preferred a modified version of Option 5, and three respondents suggested Option 5 was preferred but also included several other possible options as preferences.
123. In relation to Option 3, six respondents in total indicated a preference for one of the sub-options of Option 3: the NZLS and one law firm preferred Option 3A, three respondents suggested Option 3B (but these also proposed several other possible options), and two respondents preferred Option 3C (again, suggested along with several other possible options). Of the six respondents who indicated a preference for any of the sub-options of Option 3, two of those agreed that a separate vote of more than 50% of non-interested shareholders should be required, one indicated that a separate vote of non-interested shareholders should not be required, and three made no comment on that aspect of Option 3.
124. Those of the respondents who indicated a concern about requiring, under Option 1 or Option 3A, approval of a scheme or an amalgamation by more than 50% of total voting rights, or, under Option 3B, by more than 75% of the total voting rights, were largely concerned that it is too difficult (if not impossible) to achieve a sufficient level of shareholder voting to make such voting thresholds reachable. Some cited the Dominion scheme where the Court of Appeal overruled the Panel's submission that Dominion be required to achieve a shareholder approval threshold of more than 50% of the voting rights in the relevant Code companies. ³² The Panel believes that "shareholder apathy" can to some extent, even to a large extent, be overcome by sufficient encouragement to shareholders by the promoters of a scheme to vote on the proposal. In addition, the Panel believes that shareholders are more likely to have the confidence to vote one way or the other on a scheme proposal if they have adequate information that helps them to understand the merits of the proposal.
125. Two of the law firms which submitted that the status quo should be maintained, referred to their agreement with an article by Scott Clune, Amalgamations, schemes of arrangement and takeovers regulations; concerns of the Takeovers Panel and the need for reform, Canterbury Law Review [Vol 13, 2007] 91. In that article, Clune argues that the Panel's original proposals for schemes and amalgamations (as recommended to the Minister of Commerce and the Commerce Select Committee in 2006) were undesirable. The focus in those proposals of applying the "principles of the Code", at the Panel's discretion, are criticised in the article (and two of the respondents to the Panel's 2007 discussion paper refer the Panel to the concerns they had expressed in 2006 (without repeating them) about those aspects of the Panel's original proposals).
126. Since the focus of both of those respondents was that the status quo should be maintained, it appears that they may have overlooked the conclusion of the Clune article. Scott Clune suggests that the current New Zealand law is anomalous with that of a number of overseas jurisdictions and that a provision similar to section 411(17) of the Australian Corporations Act should be inserted into Part 15 of the New Zealand Companies Act. This is exactly what the Panel proposed in the 2007 discussion document as Option 1, which the Panel has now decided (with some modifications) is the preferred option.³³

Compulsory Acquisition

127. In response to the question as to whether the Code's 90% compulsory acquisition threshold contributes to the use of the Companies Act reconstruction provisions (in other words, whether it creates an incentive for bidders to avoid the Code), four respondents agreed that it did, five respondents suggested that it sometimes did or that it may do, five respondents made no comment and two respondents commented by reiterating the importance of the availability of the Companies Act reconstruction provisions.
128. There was no real interest from respondents on the questions related to reducing the Code's compulsory acquisition threshold. In relation to the question regarding to what level, if the compulsory acquisition threshold were reduced, it should be reduced, only four of the 16 submitters made any suggestions. These suggestions proposed thresholds ranging from 85% down to 75%. Of those who suggested 75%, the suggestion was also made that this threshold should represent 75% of non-interested shareholders or 75% of all shareholders if the Board had recommended the takeover.

Cost of Compliance

129. In response to the question regarding the advisers' fees paid by the parties to a Code offer, an amalgamation or a scheme, eleven respondents provided no comment. Four respondents indicated that the costs are related solely to the complexity of the transaction rather than the mechanism under which a transaction is achieved. One respondent (a valuer that undertakes independent adviser work) provided figures for the fees paid to it for such transactions, but requested that the figures not be released due to commercial sensitivity. However, that valuer also stated that the costs involved are related to the complexity of the transaction rather than the mechanism under which the transaction is undertaken. The figures provided show that a very complex transaction would result in fees of more than three times the amount of a straight forward transaction.
130. Submitters showed no real interest in commenting on the question regarding whether use of the different mechanisms imposed different time costs on staff, management and the Boards of the companies involved.
131. The Panel deduces from these reactions that compliance costs are not considered to have much significance in the context of transactions worth tens of millions to hundreds of millions of dollars. Clearly, the issue of greatest value to the respondents who represent "bidder" interests is certainty of outcome for a takeover or reconstruction.

Other Comments

132. The Panel is grateful for the significant effort undertaken by respondents in their submissions. Many respondents reiterated again and again the importance that schemes of arrangement under Part 15 of the Companies Act remain available as a mechanism for complex transactions involving Code companies. Of those who preferred the status quo to any change, several suggested that more focus be given to shareholders voting in interest groups as occurs in Australia.³⁴ One commentator suggested that the lack of a dedicated regulator for schemes and amalgamations was indicative of a problem with the entire Companies Act regime, suggesting that the Companies Act have its own dedicated regulator for all transactions occurring under that Act.
133. In relation to the comments provided on voting in interest groups, respondents noted the importance of not disenfranchising those who are "interested" in a transaction, such as the promoters of a scheme - they should at least be able to vote against the proposal. In addition, some suggested that a person should not be considered "interested" merely because they had been associated with the formation of the proposal.

RECOMMENDATIONS TO THE MINISTER

134. In accordance with section 8(1)(a) of the Takeovers Act 1993, and having considered the submissions received on the 2007 discussion paper, the Panel recommended to the Minister of Commerce on 16 May 2008, that the following changes be made to the Companies Act 1993:
     1. A provision is inserted into Part 15, 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 amalgamation or 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;
     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 sub-paragraph (c)); and
        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);
     3. The voting threshold in sub-paragraph (i) 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 (to some extent) the principles of the common law for determining those classes;
     5. The use of the Companies Act's 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.
135. The Panel also recommended that the Takeovers Act and the Code should be amended:
     1. 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; and
     2. as appropriate, and consequential to the proposed amendments to Companies Act, in order to ensure that the Panel has all the necessary statutory functions and powers to undertake the role proposed in these recommendations.

Footnotes

30. What is meant by "certainty" in this context is that the promoter of the scheme or amalgamation knows whether the proposal will succeed as soon as shareholders have voted at the meetings to consider the proposal. However, a takeover must remain open for acceptance for a minimum of 30 days and may be extended to 90 days. In some circumstances a takeover in New Zealand may remain open for about five months.
31. However , an article in the New Zealand Business Law Quarterly, volume 12, March 2006, Schemes of arrangement under Part XV of the Companies Act 1993 by Sacha Oudyn, then a tax Manager at PriceWaterhouseCoopers, suggests otherwise. Mr Oudyn argues that the scheme of arrangement provisions are used to circumvent the minority buy-out rights available under Part 13 of the Companies Act for dissentient shareholders and that the Court of Appeal, in Weatherston v Waltus Property Investments Limited [2001] 2 NZLR 103, appeared to indicate that, had the circumstances been different - by the time the proceedings made it to the Court of Appeal, the scheme had already largely been implemented - a buy-out option for dissentient shareholders might have been required.
32. However, in fact, the promoters of the Dominion scheme assured the Court that they would do their best to ensure that shareholders were encouraged to vote, and the scheme was approved by shareholders representing more than 50% of the total voting rights of each of the companies. Also, the recent partial takeover offer by the CPPIB for AIAL received votes approving of the partial offer by more than 60% of the total voting rights of AIAL, and the total turn out on the vote was greater than 80%.
33. Clune argues, at page 120 of the article, that Part 13 amalgamations should be allowed to continue. Clune states that banning them would "represent a departure from the theoretical basis" of the Companies Act, resulting in a takeovers regulation system peculiar to the common law world. However, this overlooks the fact that by far the vast majority of companies in New Zealand are not Code companies and would still have the Part 13 amalgamation process available to them under the preferred option. The preferred option also maintains the availability of section 222 short form amalgamations for Code companies. Accordingly the preferred option would have no impact where Code companies simply wanted to reorganise their wholly owned subsidiaries. In any event, as several respondents note in their submissions, Australia does not have Part 13 type amalgamations available at all.
34. There appears to be little case law in New Zealand relating to the Companies Act 1993 in respect of the need to hold separate meetings for different interest classes (but there is ample case law in that regard under the Companies Act 1955). The 2007 Elders v PGG Wrightson case simply refers to the issue, at paragraph [49]. The Panel believes that the common law has developed in a robust fashion in Australia where much attention is given to the issue of voting in classes of shareholders to whom a scheme is put. In order to assist with the desire for clarity and certainty in implementing the preferred option, the Panel suggests codifying, to a certain extent at least, the common law as it has developed in Australia regarding voting in classes of shareholder interests.