Defensive Tactics – Toll and Tranz Rail
Published 1 September 2003
The Panel dealt with two issues involving alleged or possible defensive tactics being used by the directors of Tranz Rail Holdings Limited (Tranz Rail).
The first concerned the agreement between the Crown and Toll Group (NZ) Limited/Toll Holdings Limited (Toll) relating to the sale of the rail network to the Crown once Toll obtained control of Tranz Rail.
The Panel received a complaint that this action amounted to a defensive action by the “directors” of Tranz Rail.
The second concerned Tranz Rail’s wish to sell the Wellington Railway Station to the Crown during the course of Toll’s takeover offer for Tranz Rail. Tranz Rail sought the approval of the Panel to the proposed sale.
Rules 38 and 39 of the Code deal with defensive tactics by the directors of a target company. Rule 38 aims to ensure that directors of Code companies do not take action which could, once notice of an offer has been given or an offer is believed to be imminent, effectively frustrate that offer. Rule 39 specifies the circumstances in which the directors of a Code company can take defensive actions.
On 7 July 2003 the Crown and Toll entered into an agreement which provided that, if a takeover offer to be made by Toll in July became unconditional:
- Toll would use its best endeavours to procure Tranz Rail to enter an agreement with the Crown under which Tranz Rail would sell its rail network to the Crown; and
- the Crown would commit to improving that rail network and rolling stock (an investment of $300 million).
Under the Toll/Crown agreement neither party could enter into a similar agreement with any other party until Toll’s July takeover offer was withdrawn or lapsed.
Infratil Limited was a shareholder of Tranz Rail. Infratil alleged that Toll’s entry into the agreement constituted a defensive tactic under rule 38 because:
- the agreement conferred significant economic benefits on Tranz Rail; and
- the exclusive nature of the agreement effectively denied those benefits to any potential rival bidders.
Neither Tranz Rail nor its then current directors were a party to the Toll/Crown Agreement. However Infratil argued that Toll could be considered to be acting as the directors of Tranz Rail for the purposes of the Code because the directors of Tranz Rail may be required to act in accordance with Toll’s directions or instructions.
The Panel held a meeting under s32 of the Act to consider the issue. The Panel did not agree with the interpretation of the term “director” put forward by Infratil. For the Toll/Crown Agreement to have constituted defensive tactics under rule 38, it must have been shown that the agreement was the result of action taken or permitted by the directors of Tranz Rail.
The Panel did not accept that “directors” for the purposes of rule 38 can include persons in accordance with whose instructions the directors of Tranz Rail may have been required to act at some point in the future, particularly if that “requirement” to act could only occur after control has passed.
Rule 38 required the directors of Tranz Rail to take some action in relation to that company’s affairs which frustrated the offer or denied its shareholders the opportunity to decide on the merits of the offer. The directors of Tranz Rail did not take any such action.
Notwithstanding that Infratil’s complaint failed, the Panel expressed concern that the agreement between Toll and the Crown may effectively frustrate rival bidders. Subsequently the Crown announced that it considered that it was free to negotiate with parties other than Toll.
Later Tranz Rail directors sought the Panel’s approval under rule 39 of the Code of its prospective sale of the Wellington Railway Station to the Crown .
Under Rule 39 there are certain circumstances where apparently defensive tactics by a Code company during the course of a takeover can still proceed. These circumstances are:
(a) if the action has been approved by an ordinary resolution of the Code company; or
(b) the action is taken or permitted under a contractual obligation entered into by the Code company, or in the implementation of proposals approved by the directors of the Code company, and the obligations were entered into, or the proposals were approved, before the Code company received the takeover proposal or became aware that the offer was imminent;
(c) if paragraphs (a) and (b) do not apply, the action is taken or permitted for reasons unrelated to the offer with the prior approval of the Panel.
The issue with the sale of the station was that Toll Holdings’ offer for Tranz Rail included a condition that:
Neither Tranz Rail or any of its subsidiaries enters into any agreement or incurs any commitment or liability in connection with the business of Tranz Rail or its subsidiaries having a value or involving an amount, or providing for payments over its term, which are in excess of $5,000,000.
Tranz Rail told the Panel that
- the sale price of the station exceeded that $5m level and that it needed to complete the transaction within a short period; and
- that Toll Holdings would not consent to waive its condition to allow the transaction to proceed without jeopardising the offer.
The Panel sought the views of Toll Holdings on Tranz Rail’s request. It also told both parties it would make the request public and seek the views of Tranz Rail’s shareholders on how it should deal with the request.
In the end the Panel did not need to decide the matter because Toll Holdings withdrew its opposition to the sale.
The Panel makes the following points:
- the Code does not prescribe the approach that the Panel should take when considering an application for approval under rule 39;
- competitors may try to use takeovers to frustrate the legitimate commercial aspirations of target companies, potentially for lengthy periods;
- the Panel will generally seek the views of the offeror and the target company shareholders, before approving an application under rule 39; and
- in considering an application under rule 39 the Panel will take into account whether the transaction is being undertaken in the normal course of the target company’s business and the application has been necessitated by a particularly restrictive condition in the offer.