Child Care Centres' modest voting rights in Kidicorp because of
these associations.
The management agreement obliged Peppercorn to manage all of
Kidicorp's childcare facilities on an exclusive basis under a longterm
contract with Kidicorp.
The first right of refusal agreement required the major
shareholders of Kidicorp (holding 56.82%) to offer their relevant
shares to Child Care Centres/Peppercorn if they sought to sell all
or any of the shares covered by the agreement. It also committed
the shareholders to accepting a full takeover offer made by Child
Care Centres/Peppercorn should it be made. Further, if Child
Care Centres/Peppercorn decided to purchase shares under rule
7(c) of the Code, they were required to make an offer to all the
major shareholders for their Kidicorp shares. The agreement
was indefinite until all the Kidicorp shares it covered were sold
to Child Care Centres/Peppercorn or it was cancelled by mutual
consent.
The Panel decided that the agreements established an associate
relationship between the major shareholders of Kidicorp and
Child Care Centres.
The exclusive management agreement (entered into slightly
earlier than the first right of refusal agreement) may not have
been sufficient of itself to constitute the parties as associates for
Code purposes since it was a management agreement, albeit an
exclusive one, rather than being concerned with voting rights.
An exemption was appropriate because ABC's increased
voting rights in Kidicorp would be a consequence of merger
transactions in Australia which were not undertaken for the
purpose of increasing those voting rights. Also, the value of
Kidicorp's assets was small in relation to those of the three
Australian companies. It would not be appropriate for the
fate of the Australian mergers to be decided by the minority
shareholders of Kidicorp. The ABC exemption was consistent
with the Panel's approach to other overseas upstream
acquisitions caught by the Code.
The exemption was necessary because ABC would become an
associate of the major shareholders of Kidicorp after one or both
mergers and accordingly its acquisition, through the merger, of
control of a small shareholding in Kidicorp would be in breach of
rule 6 of the Code.
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ABC, following the successful mergers with both Peppercorn and
Child Care Centres in late 2004, is not able to acquire control
of any shares in Kidicorp (including shares from the majority
shareholders under the first right of refusal agreement) unless
the provisions of the Code (shareholder approval or takeover)
are complied with.
Lock-up agreements and the Code
The Panel has made it clear that lock-up agreements (entry into
an agreement under which one party is agreeing to make a bid
and the other party is agreeing to sell into it) are legal in New
Zealand, but this does not mean that they have no consequences
under the Code – they do. This can be seen from the above
examples.
A lock-up agreement, by its very nature, will make the parties
associates. That is not a breach of the Code but it means that the
parties' voting rights must be aggregated and this may limit their
ability to undertake acquisitions of more voting rights.
SHAREHOLDER APPROVAL
The associate provisions of rule 4 are an anti-avoidance
mechanism. However, the Code provides the means, through
rule 7(c) in particular, for the shareholders of a code company to
approve any acquisition of voting shares. Consequently, where as
a result of the association an acquisition of voting shares would
be in breach of rule 6(1), the acquisition can be approved by
shareholders.
CONSEQUENCES OF ASSOCIATE STATUS
It is important to emphasise that it is not a breach of the Code
to become associates. What is important are the consequences
of that status. Parties that are or become associates and wish to
acquire voting rights must aggregate their holdings to determine
whether the proposed acquisition would be in breach of the
fundamental rule.
The examples set out above illustrate the fact-specific nature of
the association rules in the Code and their relationship with the
acquisition of voting rights and the fundamental rule contained
in rule 6(1). The breach in each case was not the creation or
existence of the associate status. Rather it was the acquisition of
voting rights when, after that acquisition, the associated parties'
aggregate holding of voting rights exceeded the 20% threshold.
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