The Oyster Bay Case – Part 2
Published 1 May 2006
This issue of CodeWord follows the Oyster Bay case through to its conclusion in the High Court and the start of a new takeover process. This case is particularly important as it highlights the role of directors in preparing the target company statement and their responsibilities in fulfilling that role.
CodeWord No. 15 (November 2005) reported the first part of the protracted process for control of Oyster Bay Marlborough Vineyards Limited.
The competitive takeover for Oyster Bay started in May 2005. It was initiated by Peter Yealands Investments Limited, the holder of some 6.7% of the shares in Oyster Bay. On 7 June 2005 Yealands made a partial offer to obtain enough shares to hold 51.1% of the shares of Oyster Bay. Delegat’s Wine Estate Limited, who already held 32.58% of Oyster Bay, made a counter-bid on 7 July 2005 to attain 50.1% of the voting rights. As well as being a shareholder, Delegat’s was party to very long-term contracts with Oyster Bay for the development and management of the vineyards and for the purchase each year of Oyster Bay’s entire grape harvest.
The Delegat’s bid reached the minimum acceptance level. However, Yealands and another Oyster Bay shareholder, Mr David Rankin, made complaints to the Panel relating to valuations of the vineyards, in particular the omission of reference to the value of the land excluding the effect of the various contracts with Delegat’s (the unencumbered value).
At a section 32 meeting the Panel determined that it was not satisfied that Oyster Bay had complied with the Code by issuing its target company statement without the unencumbered valuation information. The Panel restrained Delegat’s from declaring its offer unconditional and from acquiring any shares of Oyster Bay pursuant to its offer.
The Panel put forward a “preferred solution” which was to issue an agreed correcting statement and give accepting shareholders the right to cancel their acceptances of the Delegat’s offer.
Delegat’s initiated action in the Wellington High Court seeking to have the Panel’s restraining orders set aside. Delegat’s also wrote to all accepting shareholders giving its version of the land valuation issue, and inviting them to withdraw their acceptances or express support for the bid proceeding.
The Panel initiated proceedings against Delegat’s and Oyster Bay seeking new interim restraining orders from the Court. After a hearing on 7 October 2005 Justice Miller said “… I am satisfied that Oyster Bay has failed to comply with R46 of the Code and that the interim orders that the Panel seeks should be granted.”
Oyster Bay Part 2
At the High Court proceedings Yealands and Rankin supported the Panel’s request for the extension of interim restraining orders but asked the Court to void Delegat’s bid and require the takeover process to start again.
The Court held the final hearing on 28 November 2005 after a hearing on 9 November to deal with a number of procedural issues. From the exchange of documents ahead of the 28 November fixture all parties were aware that Logan Stone had provided new 2005 vineyard valuations to Oyster Bay on 10 July 2005 but these had not been provided to Ferrier Hodgson or the directors of Oyster Bay before the target company statement was finalised on 19 July 2005.
Before the hearing Ferrier Hodgson told the Panel that, had it known of the 2005 valuations, it would have calculated a higher NTA valuation of Oyster Bay ($3.98 as against $3.26) and could have revised its primary valuation (on a DCF basis) upwards. This would have meant that the final offer price of $4 per share would no longer have appeared to be at a premium above valuation.
Miller J invited the Panel to make a recommendation to the Court under section 38 of the Takeovers Act. In that recommendation the Panel said it would no longer be asking the Court for orders to enable its “preferred solution” to be implemented. The Panel said that this decision was based on the issues that had recently arisen. In addition to the original breach, there was the failure to incorporate the 2005 valuations in the target company statement and independent adviser’s report. Also Yealands had given an undertaking to the Court that it would make a fresh bid at $4.50 per share, but only if the Delegat’s offer was voided. The combination of these and other factors meant that the only appropriate course was to void the Delegat’s takeover offer and restart the takeover. This would leave Yealands under an obligation to make another offer for Oyster Bay and it would be up to Delegat’s to decide whether it would also make a fresh bid.
Miller J said in his judgment of 28 November 2005 (Takeovers Panel v Delegat’s Wine Estate Limited (No 3)(Unreported, HC Wellington, Miller J, CIV-2005-485-2058)) that he was “satisfied that the 2005 Logan Stone valuation ought to have been disclosed as being material to shareholders. …. It would have altered Ferrier Hodgson’s conclusion that at $3.50 both offers were fair, and of course it would have altered the independent directors’ advice that shareholders were being offered a premium for control. …”
His Honour said he remained of the view that “… the difference between the unencumbered value and the Logan Stone ‘value in use’ DCF valuation could reasonably be expected to be material in circumstances where shareholders were considering two partial offers, one of which was from Delegat’s. He concluded that “… the Code was contravened by the omission of information that could reasonably be expected to be material to shareholders, in the form of unencumbered vineyard values and the 2005 Logan Stone valuation”.
The judgment said that, even on the affidavit evidence for Oyster Bay, it was possible to say that “…the standard of care required by the Code was not observed. Those signing the certificate [in the target company statement] were not in a position to express the view that information in the Target Company Statement was true and correct and not misleading, by omission or otherwise. Proper enquiries had not been made to identify the information that was reasonably likely to be material to shareholders, and to ensure it remained accurate as at the date of the Statement. …”
His Honour noted that Delegat’s had a considerable advantage, even if the contracts were made voidable at the shareholders’ option, because it had won the takeover contest. He said that he was satisfied that “…Delegat’s would not have enjoyed the same advantage had the 2005 valuation and the unencumbered vineyards value been disclosed on 19 July ….”
After discussing the impact on shareholders, who had sold to Delegat’s for only $4 per share, the judgment concluded that Oyster Bay’s breach went to the heart of Delegat’s offer. His Honour said that he “…agree[d] with the Panel’s view that the process was too seriously flawed to allow it to stand, and the deficiencies [could not] be remedied by means of a corrective statement.” He accepted the Panel’s recommendation that the Delegat’s offer be voided. The Court exercised its powers to void the Delegat’s offer and require the takeover process to start again.
Yealands announced that it would act on its undertaking to make a new partial offer of at least $4.50 per share by mid-December. Subsequently Delegat’s gave notice of intention to make a further partial offer at $5 per share. Shortly afterwards Yealands and Delegat’s reached an arrangement whereby Delegat’s made a partial offer at $6 per share and Yealands agreed to accept that offer. Yealands was released from the undertaking it had given the Court to make a new offer at a minimum of $4.50 per share.
The Oyster Bay case emphasises the importance of the role of directors in preparing the target company statement and the care needed to fulfil that role.
In preparing the target company statement directors must consider all relevant information about the assets, liabilities, prospects and affairs of the target company that could reasonably be expected to influence a shareholder’s decision on whether or not to accept a particular bid, and ensure all such information is disclosed. Directors must be very careful not to prejudge shareholders’ ability to assimilate complex information. Directors are responsible for providing information in a form which shareholders can understand and interpret.
It is also vital that directors and the independent adviser ensure that they have the most up-to-date information.
The Court has shown that where breaches of the Code relating to a target company statement are serious it will use its powers to void a takeover and force a restart of the takeover.
The Panel is pleased with the outcome of the Oyster Bay litigation, but it prefers to avoid recourse to the Courts. The Panel prefers to facilitate the takeover process but will, where necessary, seek appropriate orders from the Court when the Code is breached.