Discussion Paper: Schemes of Arrangement and Amalgamations Involving Code Companies
19 June 2006
Possible amendments to the Code and the Companies Act
The Panel believes that ensuring consistency in respect of the rights and protections of code company shareholders in the context of mergers and acquisitions regardless of the mechanism utilised to effect such a transaction, while preserving the rights of companies to choose which means of changing control they use, can best be achieved by amending the Code and the Companies Act so that:
- schemes and amalgamations are carved out of the Code completely; and instead
- the principles of the Code are introduced into the provisions of the Companies Act dealing with schemes and amalgamations.
We discuss this approach separately in respect of schemes of arrangement and amalgamations.
Schemes of arrangement
In respect of schemes of arrangement a similar approach to that taken in Australia could be utilised in New Zealand. To avoid problems resulting from the Code applying to some schemes and not others and to also address the difficulties resulting from trying to comply with the provisions of both the Code and the Companies Act, those Acts could be amended as follows:
- the Code could be amended to no longer apply to changes of control resulting from a scheme of arrangement under Part XV of the Companies Act (with the definition of control being sufficiently broad to ensure that the alternative protections are not also avoided); and
- Part XV of the Companies Act could be amended to require that:
- the Courts consider the principles of the Code when deciding what the appropriate process adopted in respect of a scheme of arrangement should be, including the level of shareholder approval required and the information that needs to be provided to shareholders; and
- before approving a scheme of arrangement the Court would have to receive and take into account recommendations from the Panel as to the requirements to be met for the scheme of arrangement to be approved.
Such an amendment to Part XV of the Companies Act would not require the Court to follow or implement the recommendation of the Panel. However, if the legislature were to approve such an amendment the Courts would have a clear direction as to the legislature's intended relationship between schemes of arrangement and the Code which they do not currently have.
The Panel considers that the Court, and the Panel in making recommendations to the Court regarding a proposed scheme, should take into account the principles of the Code rather than the objectives of the Code.
By considering the principles of the Code the Courts could apply the broader principles of the Code of equal treatment and fairness in the particular circumstances of the proposed scheme to ensure that the rights of shareholders of code companies are not detrimentally affected by the form of mechanism used to effect a change of control.
A provision for the Panel to provide recommendations would ensure that the Court in considering an application for approval of a scheme would have more balanced information before it than we suspect is currently the case.
Under the current provisions of Part XV of the Companies Act the Court is presented with submissions from only the parties to the proposed scheme of arrangement. There is a procedure for shareholders to be heard but this requires shareholders to take affirmative action. Some shareholders may not understand all of the issues involved in a scheme and the differences between a scheme and a code transaction. If the Court were required to take into account recommendations from the Panel, it would have a wider range of views to help it to make its decision regarding what requirements are needed to protect the rights of code company shareholders.
The Panel would like to hear from market participants regarding the possible amendments to the Code and Companies Act described above. Would such amendments address concerns that market participants have regarding the use of schemes of arrangement in respect of code companies? Are there other alternatives which market participants would like to suggest?
The benefits of any possible amendment to the Code and Part XV of the Companies Act will need to be balanced against the costs of such amendments.
We suggest the direct costs and compliance costs resulting from the amendments discussed above may not be significant. Under the current provisions of the Companies Act parties make submissions to the Court and hold shareholder meetings. The introduction of Code principles into this process would not appear to significantly increase the cost of putting a scheme proposal to shareholders. We suggest that the level of disclosure to shareholders would be similar even though the information provided would be different. We suggest that the only significant additional direct cost would be the cost of appointing an independent adviser, although we note that market practice does appear as a matter of course to embrace the appointment of an independent adviser for the preparation of an appraisal report.
Any increases in direct costs and/or compliance costs may be mitigated by the fact that as a result of such proposed amendment parties wishing to utilise the scheme provisions of the Companies Act, that are required to comply with the Code, would not need to apply to the Panel for exemptions from the Code.
The Panel would like to hear from market participants on possible compliance costs resulting from the type of amendment to the Code and Part XV of the Companies Act described above.
Amalgamations
To avoid problems resulting from the use of the amalgamation provisions of the Companies Act to effect a merger with or acquisition of a code company the Code and the Companies Act could be amended as follows:
- the Code could be amended to no longer apply to changes of control resulting from an amalgamation under Part XIII of the Companies Act (with the definition of control being sufficiently broad to ensure that the alternative protections are not also avoided); and
- Part XIII of the Companies Act could be amended to require that:
- parties to a proposed amalgamation must obtain the approval of the Panel to the amalgamation process; and
- the Panel, in giving approval for an amalgamation process, take into account the principles of the Code.
We suggest that the Panel's approval of an amalgamation process would be subject to conditions based on the principles of the Code.
We would not suggest that in approving an amalgamation process the Panel would always seek to impose identical requirements to those contained in the Code. The Panel would instead take into consideration the particular circumstances of the amalgamation. The Panel would look to apply the broader principles of the Code of equal treatment and fairness. In considering appropriate thresholds in respect of amalgamations the Panel would be able to take into account the minority buy-out rights currently available to dissenting shareholders and the compulsory acquisition provisions of the Code.
This approach would continue to allow companies to utilise the amalgamation provisions of the Companies Act in respect of transactions involving code companies but in a manner that ensures that shareholders of code companies continue to have comparable or similar rights and protections to those provided by the Code.
Do market participants consider that an amendment of this type would be appropriate?
The Panel also considers that it may be appropriate to amend the minority buy-out provisions of the Companies Act in respect of amalgamations involving code companies.
The minority buy-out right is only available to shareholders who cast a dissenting vote at a meeting held to consider an amalgamation proposal. Under the Code compulsory acquisition rights apply in respect of all outstanding shareholders i.e. all those who have not accepted a code offer.
Under the Code if a person becomes the dominant owner of a code company as a result of an acquisition or allotment approved by shareholders and then wishes to compulsorily acquire the remaining shares, the consideration paid to compulsorily acquire shares must be certified as fair and reasonable by an independent adviser approved by the Panel. A further independent expert may be appointed to determine the compulsory acquisition price if a specified level of outstanding shareholders object to the price being paid.
Under the minority buy-out provisions of the Companies Act, the company will nominate a fair and reasonable value for the shares and shareholders can object to that price. The company must then refer the matter to arbitration. However, shareholders do not have an independent certification as to the initial price to assist them in determining whether or not to object to the price. As already mentioned these provisions only apply to those shareholders who actually voted against the amalgamation.
The Panel would like to hear from market participants regarding the minority buy-out right for dissenting shareholders contained in the Companies Act for code companies. Do market participants consider that instead of dissenting shareholders having minority buy-out rights under the Companies Act the Panel should have the power to impose as a condition of approval of any amalgamation proposal that all shareholders of the relevant code company have rights and protections consistent with the compulsory acquisition provisions of the Code?
In terms of the compliance costs of the possible amendments to the Code and Part XIII of the Companies Act described above, an amendment of this nature would increase compliance costs for companies wishing to utilise the amalgamation provisions of the Companies Act because of the need to apply to the Panel for approval.
Currently amalgamations take place without the involvement of any regulator. An amendment of the type discussed above would mean that code companies wishing to put an amalgamation proposal to shareholders would need to make an application to the Panel for approval of the proposed amalgamation process.
These potential compliance costs would need to be weighed against the benefits to code company shareholders of ensuring that they have comparable rights and protections in respect of amalgamation proposals to those provided in the Code.
The Panel would like to hear from market participants on possible compliance costs resulting from the type of amendment to the Code and Part XIII of the Companies Act described above.