Arrangements, amalgamations and compromises under Part XV of the Companies Act

Under Part XV of the Companies Act the Court has a broad power to declare any arrangement, amalgamation or compromise binding in respect of the company or companies concerned.

A scheme of arrangement under Part XV can take a wide variety of forms. It can be an amalgamation in the same form as under Part XIII but instead be carried out with Court supervision. It could also be the acquisition of a company by another company.

Under Part XV of the Companies Act the Court is free to determine what it shall take into consideration in approving scheme proposals and what processes are appropriate.

Before making a final order under Part XV the Court may, of its own volition or in response to an application from an interested party, make initial orders:

1. Requiring that notice be given to certain persons;
2. Requiring the holding of meetings and specifying the method of shareholder approval;
3. Requiring that a report be prepared and distributed: and/or
4. Specifying who is entitled to be heard on the application.

Before sanctioning a scheme of arrangement the Court commonly requires that it be satisfied of the following⁵:

1. There has been compliance with the statutory provisions as to meetings, resolutions, the application to the Court and the like;
2. The scheme has been fairly put to the class or classes concerned and, if a circular or circulars have been sent out (as is usual), those circulars gave all the information reasonably necessary to enable the recipients to judge and vote upon the proposals;
3. Each relevant class was fairly represented by those who attended the meeting and that the statutory majority were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class whom they purported to represent; and
4. The scheme was such that an intelligent and honest person of business being a member of the class concerned, and acting in respect of his interest, might reasonably approve.

Unlike an amalgamation under Part XIII dissenting minorities do not have buy-out rights under section 110 in respect of schemes of arrangement.

Like an amalgamation, a scheme of arrangement will only have Code consequences if it results in a person becoming the holder or controller of more than 20% of the voting rights in a code company.

It is sometimes possible for parties increasing voting control in a code company under a scheme of arrangement to comply with both the requirements set down by the Court in respect of that scheme and the requirements of the Code in a similar manner to amalgamations, i.e. by seeking shareholder approval for an acquisition or allotment in compliance with the Code as well as in compliance with the requirements set down by the Court.

There are some circumstances in which compliance with the Code is required but is not possible in respect of a scheme. The Panel has previously indicated that it is likely to grant exemptions to parties who cannot comply with the Code in respect of an acquisition or allotment under a scheme of arrangement. The conditions of any such exemption would be based on the objectives and mechanisms of the Code. The Panel's policy on schemes seeks to ensure that the principles of the Code are not subverted by the use of a scheme, particularly in respect of the thresholds for approval of schemes.

However, it is possible to structure schemes to avoid the jurisdiction of the Code entirely. A scheme can be structured as an amalgamation where the code company goes out of existence or the scheme can provide for the cancellation of voting rights in a code company before any person acquires the relevant shares. In both cases the ultimate result is the same as if there were an acquisition under the Code but there is no technical breach of the fundamental rule because no person will become the holder or controller of voting rights in the code company under the scheme.

If a scheme in respect of the merger with or acquisition of a code company is structured in a manner that avoids the application of the Code, the transaction will proceed only on the basis of the requirements of the Court. The level of shareholder support required for the transaction to proceed will be determined by the Court and may be different from the level of shareholder support required by the Code. It is likely that shares in the code company will in effect be able to be compulsorily acquired with the support of the holders of less than 90% of the total voting rights in the relevant code company.

In the past two years two mergers structured as schemes of arrangement have utilised the device of cancelling voting rights attaching to shares in a code company before those shares were acquired. In one of those mergers the parties also relied on a class exemption for allotments under initial public offers to comply with the Code in respect of the allotment of shares in a new code company under a scheme of arrangement. The Panel considers that in those two cases the schemes were intentionally structured to avoid the provisions of the Code.

Panel's recent actions

Taking into account the apparent trend to effect changes of control of code companies by the use of schemes of arrangement, market reaction to that trend and the importance placed by the Panel on the availability of the protections offered by the Code when changes of control occur in code companies, the Panel recently decided that 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 considers that it would be of assistance to the Court in its supervision of schemes of arrangement to receive submissions from the Panel on the use of the scheme procedure and the protections contained in the scheme for shareholders, particularly minority shareholders, taking into account the special legislative treatment relating to code companies contained in the Takeovers Act 1993 and the Code. The Panel has not yet made any submissions to the Court regarding proposed schemes of arrangement. It is uncertain what weight the Court will give to such submissions or indeed if the Panel would be heard.

The class exemption for initial public offers, previously contained in clause 7 of the Takeovers Code (Class Exemptions) Notice (No.2) 2001, was granted to enable new public company floats to proceed where the parties have complied with the Securities Act 1978 and some additional disclosures about control percentages to be obtained by major or cornerstone shareholders have been made in the prospectus and investment statement. The Panel considered that the use of this class exemption in schemes of arrangement was not appropriate and revoked the exemption with effect from 19 May 2006.

Footnotes

5. These matters were set out in Re CM Bank Limited [1944] NZLR 248