combined elements of a relationship may strongly support a
finding that in the circumstances parties should be regarded as
associates. The Panel considers each element separately and then
as a whole to assess the combined impact.
Associate status cannot be negated merely by a contractual
acknowledgement that a particular party will not control the
voting rights of another party.
Some situations which the Panel has considered show the Panel's
interpretation of the term "associate". These are outlined below.
EXAMPLES OF ASSOCIATION
Bridgecorp Capital Limited
In late 2004 Bridgecorp Capital Limited acquired 19.99% of the
voting rights in Dorchester Pacific Limited from Mr Brent King,
the managing director of Dorchester, and from other interests.
Mr King retained 5.05% of Dorchester and subsequently
purchased a further 0.9% of Dorchester. Consequently King and
Bridgecorp held 25.94% of Dorchester between them. At the
same time that King and Bridgecorp entered into the sale and
purchase agreement in respect of 19.99% of Bridgecorp, they also
entered into an agreement described as a "lock-up deed" which
was in substance an option deed.
To decide whether Bridgecorp and King were associates,
the Panel considered the facts around the entering into of
each agreement and the expectation of the parties after the
agreements.
The sale and purchase agreement between Bridgecorp and King
provided for a number of ongoing relationships such as:
- an employment commitment by King to remain as CEO of Dorchester for a period;
- a restraint of trade for King, preventing any competition with Dorchester's business within 6 months of his leaving Dorchester's employment, should he do so; and
- a restraint on King buying any more shares in Dorchester for 12 months.
The option deed provided for:
- the payment of $600,000 by Bridgecorp to King for an option;
- a standstill on King's shares (preventing him from selling his remaining Dorchester shares);
- an option (for 10 months) for Bridgecorp to purchase the remainder (5.05% of Dorchester's voting rights) of King's Dorchester shares at a fixed price; and
- a commitment by King to accept a possible future takeover offer by Bridgecorp (although Bridgecorp did not commit to
making such an offer).
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The Panel considered that as a result of these ongoing contractual
provisions relating to the future control of voting rights in
Dorchester and other commitments the parties were associates
under the Code. Their combined holding of voting rights after
the transactions exceeded the 20% threshold and consequently
the acquisition of voting rights was in breach of the Code.
After making its determination the Panel accepted enforceable
undertakings from Bridgecorp to sell down approximately 5%
of the voting shares of Dorchester and from King to sell down
approximately 0.9% of the voting shares in Dorchester. These
sales put Bridgecorp and King back in the position they would
have been in had their acquisitions as associates complied with
the Code. The two parties also undertook to unwind the option
deed and elements of the sale and purchase agreement, thus
removing contractual elements of their association.
Prime Infrastructure Networks (New Zealand) Limited
Another example of association through a contractual agreement
(this time a genuine lock-up agreement) and acquisitions by
associates arose in the Prime/Powerco takeover. This was
a takeover offer by Prime Networks, a subsidiary of Prime
Infrastructure Management Limited (PIML), for all of the equity
securities in Powerco.
PIML entered into lock-up agreements with four shareholders in
Powerco in August 2004. The four shareholders, known as the
Council shareholders, together held approximately 53.65% of the
shares in Powerco. The lock-up agreements:
- required Prime networks to make a full takeover offer for Powerco within a specified period, and
- required the Council shareholders to accept that offer.
The Panel's view was that the lock-up agreements between PIML
and the Council shareholders created an associate relationship
between those parties. Consequently the subsequent on-market
acquisitions of 1.27% of Powerco shares by PIML's subsidiary,
Prime Infrastructure Networks (Australia) Pty Limited (Prime
Australia), would be in breach of the Code as the combined
holdings of PIML and the Council shareholders exceeded the 20%
limit imposed by rule 6. These views were conveyed to Prime
Australia's legal advisers. Although not necessarily accepting
that PIML and the Council shareholders were associates, Prime
Australia sold the acquired shares almost immediately.
The importance of the associate principle is clear because
otherwise, potentially, PIML could have bought up to a total of
20% of the voting rights on-market before launching its takeover,
even though it had pre-bid commitments for over 50% of the
voting rights in Powerco.
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