Lock-up agreements and shareholders’ agreements – are the parties ‘associates’?
Published 1 April 2015
Parties to lock-up agreements and shareholders’ agreements need to take care to ensure that they adhere to the fundamental rule of the Code (i.e., no person, together with their associates, increases their shareholding over 20% other than in accordance with the Code or an exemption).
The Panel has in the past determined that the parties to lock-up agreements were ‘associates’ merely by virtue of being party to the agreements. By contrast, the Panel has in the past considered whether shareholders’ agreements result in the parties being associates under the relevant circumstances on a case-by-case basis.
The Panel has reviewed its position on association and lock-up and shareholders’ agreements. The Panel’s revised position is that parties to a lock-up agreement or a shareholders’ agreement may be associates of each other for the purposes of the Code, but the terms and nature of those agreements and the surrounding circumstances need to be considered on a case by-case basis. The Panel considers that in some circumstances, described further below, the parties will not be associates.
Set out below is broad guidance to assist the market in deciding whether under the circumstances an associate relationship may exist between the parties to a lock-up or shareholders’ agreement. The guidance provides as much certainty as possible, but, ultimately, the Panel must consider all transactions on a case-by-case basis, especially if a complaint is made and the Panel needs to make a formal determination under section 32 of the Takeovers Act 1993
The Panel’s revised position is that parties to a lock-up agreement or a shareholders’ agreement may be associates of each other for the purposes of the Code, but the terms and nature of those agreements and the surrounding circumstances need to be considered on a case by-case basis.
Definition of ‘associate’
Rule 4 of the Code defines a person as being an associate of another person if:
(a) the persons are acting jointly or in concert; or
(b) the first person acts, or is accustomed to act, in accordance with the wishes of the other person; or
(c) the persons are related companies; or
(d) the persons have a business relationship, personal relationship, or an ownership relationship such that they should, under the circumstances, be regarded as associates; or
(e) the first person is an associate of a third person who is an associate of the other person (in both cases under any of paragraphs (a) to (d)) and the nature of the relationships between the first person, the third person, and the other person (or any of them) is such that, under the circumstances, the first person should be regarded as an associate of the other person.
A lock-up agreement is a legal commitment by a shareholder in a Code company to accept a takeover offer.
Panel’s early position on lock-up agreements and association
The Panel’s early position on lock-up agreements was that the parties to a lock-up agreement were likely to be associates of each other for the purposes of the Code. This resulted from the Bridgecorp Capital Limited Determination 2004 (found here) where the Panel indicated that lock-up agreements are permissible under the Code, but a lock-up agreement will generally constitute the parties as associates.
Panel’s further consideration of lock-up agreements and association
As a result of market feedback and the Panel’s experience since the Bridgecorp determination, the Panel has considered further its views regarding whether the parties to a lock-up agreement should necessarily be regarded as associates of one another merely by entry into such an agreement. The Panel considers that an associate relationship may not exist, merely by virtue of a lock-up agreement, if:
(a) the agreement is a commercial arm’s length commitment (i.e., a straightforward agreement to make and accept a takeover offer and the parties are not acting jointly or in concert, but rather on opposite sides of the contract);
(b) the agreement does not go beyond making and accepting a takeover offer, and does not include ongoing covenants;
(c) there is no other ongoing relationship of the parties (i.e., the relationship ends when the shares are transferred in accordance with the takeover offer);
(d) the agreement expressly precludes control of voting rights passing to the offeror prior to the takeover offer becoming unconditional; and
(e) the agreement is short-term, lasting no longer than the settlement or lapsing of the takeover offer.
The above list is not an exhaustive list of the terms that may be included in lock-up agreements without creating an associate relationship under the circumstances. Generally, in a lock-up agreement the seller will wish to approve the terms on which the offer is made and any variations to the terms. The Panel accepts that within reason it is a necessary incident of a lock-up agreement, but it will be a question of degree in each case as to whether the extent of the approval rights is such as to make the lock-up parties associates.
The Panel accepts that the seller will wish to have certainty as to the essential terms on which the offer will be made, such as price, timetabling and material conditions. Provisions which seek to do no more than this are unlikely of themselves to make the parties associates under the circumstances; and nor are terms which secure a proportionate commercial benefit for all shareholders, such as making acceptance of the offer contingent on the target company paying a dividend or making a taxable bonus issue
However, the more control a seller seeks to exert, particularly with terms or other arrangements which seek to exert influence over the behaviour of an offeror once an offer has been made, the more likely it is that the Panel may conclude that in the circumstances the parties are associates.
As a broad proposition, however, under the Panel’s revised position, many lock-up agreements will no longer result in an assumed association between the parties.
Examples of agreements that would not likely result in the parties being associates (merely by virtue of the agreement)
Set out below are three recent examples of lock-up agreements that contained terms which, if considered under the Panel’s revised position, would not likely result in the lock-up parties being associates merely by virtue of the lock-up agreements.
Lyttelton Port Company Limited 2014
Christchurch City Holdings Limited (CCH) was the holder and controller of 79.70% of the voting rights in Lyttelton Port Company Limited. CCH entered into a lock-up agreement with Port Otago Limited under which Port Otago agreed to accept CCH’s full takeover offer. The material terms of the lock-up agreement included that:
(a) CCH agreed, subject to the satisfaction of certain conditions, to make the offer to all shareholders on the terms attached to the agreement;
(b) Port Otago would accept the offer, in respect of its 15.48% of Lyttelton Port shares, on or before the later of the date that was two business days after the despatch of the offer or the date that the dividend condition of the offer was satisfied;
(c) Port Otago could not sell or otherwise dispose of its shares, except so as to accept the offer, unless the offer was terminated or lapsed; and
(d) Port Otago retained the right to exercise and/or control the exercise of all voting rights attached to its shares until payment for the shares had been recovered.
For the purposes of the offer, CCH and Port Otago were treated as associates under the Code and, as such, Port Otago’s shareholding was excluded from the calculation of acceptances for the purposes of rule 56 (the effect of the Panel’s revised position on rule 56 is discussed below). Assuming there were no other circumstances that would indicate that CCH and Port Otago were associates (and the Panel will continue to consider these circumstances on a case-by-case basis, particularly if a complaint is made), it is likely that under the Panel’s revised position, CCH and Port Otago would not have been considered associates of one another merely as a result of the lock-up agreement.
Acurity Health Group Limited 2014 (intra-bid lock-up agreement)
In August 2014, Connor Healthcare Limited made a full takeover offer for Acurity Health Group Limited. During the course of the offer, Connor entered into an intra-bid lock-up agreement with AMP Capital Investors Limited pursuant to which AMP agreed to accept the offer, provided that Acurity first announced a pro-rata taxable bonus issue to be made to all shareholders before settlement of the offer.
Assuming that AMP and Acurity were not associates for any other reason, it is likely that under the Panel’s revised position, they would not have been considered associates of one another merely as a result of the lock-up agreement.
Fisher & Paykel Appliances Holdings Limited 2012
In 2012, Haier New Zealand Investment Holding Company Limited made a full takeover offer for Fisher & Paykel Appliances Holdings Limited (FPA). Haier controlled 20% of the voting rights in FPA (by power of attorney granted by the registered owner, Haier (Singapore) Management Holdings Co. Pte Limited).
Haier entered into a lock-up agreement with Allan Gray Australia Pty Limited under which Allan Gray agreed to accept Haier’s offer. The material terms of the lock-up agreement included that:
(a) Haier agreed, subject to the satisfaction of certain conditions, to make the offer to all shareholders on the terms attached to the agreement;
(b) Allan Gray agreed to accept the offer in respect of its entire holding of 17.46% of FPA shares on or before the later of the date which was two business days after the date of despatch of the offer and the business day after Allan Gray received the offer; and
(c) Allan Gray retained the right to exercise and/or control the exercise of all voting rights attached to its FPA shares until the offer became unconditional.
Haier also entered into a number of intra-bid lock-up agreements with certain shareholders of FPA under which those shareholders agreed to accept Haier’s offer within one business day after they had received a variation notice from Haier to vary the offer price from $1.20 to $1.28 per FPA share.
For the purposes of the offer, Haier and each of the lock-up parties would have been considered associates under the Code. Assuming that Haier and the lock-up parties were not associates for any other reason, it is likely that under the Panel’s revised position, the parties would not have been considered associates of one another merely as a result of the lock-up agreement.
Examples of agreements that will result in association
The following are examples of lock-up agreements that went beyond the mere making and acceptance of a takeover offer and resulted in the parties being associates.
Bridgecorp Capital Limited 2004
In August 2004, Bridgecorp Capital Limited acquired 19.99% of the voting rights in Code company Dorchester Pacific Limited from Mr King (Managing Director, Dorchester) and entered into a lock-up deed with Mr King in respect of 5.05% of the voting rights in Dorchester. Subsequently, Mr King purchased a further 0.9% of the voting rights in Dorchester. Together, Bridgecorp and Mr King held 25.94% of Dorchester. The “lock-up deed”, which was in substance an option deed, provided for:
(a) the payment of $600,000 by Bridgecorp to Mr King for the call option referred to in (c);
(b) a standstill on Mr King’s shares (preventing him from selling his remaining Dorchester shares);
(c) an option (for 10 months) for Bridgecorp to purchase the remaining 5.05% of Mr King’s Dorchester shares at a fixed price; and
(d) a commitment by Mr King to accept a possible future takeover offer by Bridgecorp (although Bridgecorp did not commit to making such an offer).
There were also a number of ongoing relationships in respect of the sale and purchase of the 19.99% of Dorchester that Bridgecorp acquired from Mr King, including employment commitments by Mr King to remain as CEO of Dorchester and various restraint of trade provisions.
The arrangements did not constitute a straightforward agreement to make and accept an offer, as it was effectively an option to purchase. The Panel considered that as a result of the ongoing contractual provisions relating to the future control of voting rights in Dorchester and other commitments the parties were associates under the Code.
Finzsoft Solutions Limited 2013
Various Finzsoft Solutions Limited shareholders entered into a lock-up agreement in respect of the 2013 full takeover offer for Finzsoft by Holiday Group Holdings Limited. The lock-up agreement included terms relating to the resignation of a director of Finzsoft, the post offer employment of a new managing director of Finzsoft, and the remuneration arrangements for the new managing director.
This was not a straightforward lock-up agreement as the agreement went beyond the mere making and acceptance of a takeover offer by also including terms relating to director appointment.
Acurity Health Group Limited 2014 (pre-bid lock-up agreement)
Austron Limited and Evolution Healthcare (NZ) Pty Ltd were shareholders of Acurity Health Group Limited. Austron and Evolution entered into a takeover implementation deed whereby they would make a joint full takeover offer for Acurity, through Connor Healthcare Limited. Under the deed, the parties agreed to procure the execution of a multilateral lock-up agreement that was entered into by Austron, Royston Hospital Trust Board, Medusa Limited and Connor.
Given that the lock-up agreement formed part of a wider agreement by the parties (the takeover implementation deed) which contained specific terms in relation to the parties’ involvement in the takeover offer process and future relationship, the lock-up agreement was not a straightforward agreement to make or accept an offer.
If the lock-up parties are not associates, then any acquisitions made by the offeror under rule 36 do not need to take into account the percentage of the lock-up parties’ voting rights for the purposes of the 20% threshold.
What does this mean for parties that are not associates?
First, if the lock-up parties are not associates, then prospective takeover offerors could acquire up to 20% of the voting rights after entering into the lock-up agreement and in advance of actually making the takeover offer. The non-associated lock-up parties’ voting rights would not need to be considered at this point in terms of the fundamental rule.
Secondly, rule 36 of the Code provides that, during the offer period, the offeror must not acquire any equity securities in the target company other than under the offer unless, among other things, the acquisition will not result in the offeror and the offeror’s associates holding or controlling in total more than 20% of the voting rights in the target company (excluding acceptances under the offer), unless the offer has become unconditional. If the lock-up parties are not associates, then any acquisitions made by the offeror under rule 36 do not need to take into account the percentage of the lock-up parties’ voting rights for the purposes of the 20% threshold.
Thirdly, when determining compulsory acquisition consideration when an offeror has become a dominant owner by reason of acceptances of an offer, rule 56 provides that if more than 50% of the equity securities under offer are accepted into the offer then the consideration price will be the offer price (and there is no provision for objecting to the consideration). However, the equity securities held or controlled by the offeror and its associates are excluded from this calculation, as are acquisitions made under rule 36. The remaining acceptances are termed the ‘free float’.
If the lock-up parties are not associates of the offeror, then their voting rights are included for the purposes of determining whether more than 50% of the free-float is accepted into the offer. If 50% or less of the free-float is accepted into the offer (and the offeror becomes the dominant owner) then rule 57 provides that shareholders may object to the compulsory acquisition consideration. These are just some examples of the Code provisions that relate to association and affect lock-up parties. As a result of the Panel’s revised position on lock-up agreements and association, it will be easier for an offeror to complete a takeover offer and the likelihood of shareholders having the right to object to the compulsory acquisition consideration will be lower.
The Panel’s view on shareholders’ agreements has been and remains that the parties to those agreements may be associates for the purposes of the Code. Whether or not those parties are in fact associates will depend on the nature of the shareholders’ agreement and the surrounding circumstances.
However, the Panel offers additional guidance in order to help determine whether or not an associate relationship may exist between the parties to a shareholders’ agreement:
(a) an agreement that merely contains terms relating to pre-emptive or drag/tag along rights and obligations is unlikely on its own to give rise to an associate relationship;
(b) an agreement that contains terms relating to voting requirements or that gives certain shareholders specific rights, such as for appointment as directors, may give rise to an associate relationship;
(c) whether the agreement applies to all or a select group of shareholders may also be relevant (with agreements for select groups or individuals increasing the likelihood of their being associates of each other); and
(d) collateral arrangements or ongoing relationships outside of the shareholders’ agreement should be considered together with the shareholders’ agreement and together these may give rise to an associate relationship.
The terms of shareholders’ agreements can vary significantly and may relate to a period of time when the company had a small number of shareholders. It is difficult to identify specific principles to determine whether the parties to a shareholders’ agreement may be associates. The above guidance is therefore very general and the Panel will continue to consider questions of association for these types of agreements on a case-by-case basis.
The Panel has in the past granted an exemption to allow the parties to unwind an agreement in order to “dis-associate” themselves. If the parties to an agreement are likely to be associates of one another merely by virtue of their being party to a shareholders’ agreement, an exemption may be granted to aid transition to full Code compliance.
 In reaching its determination, the Panel considered the facts around the entering into of each agreement and the expectation of the parties after the agreements. The agreements and the parties’ conduct gave rise to a number of ongoing relationships between Mr King and Bridgecorp. The Panel considered that the result of those ongoing contractual provisions relating to the future control of voting rights in Dorchester and other commitments and conduct was that Mr King and Bridgecorp were associates under the Code
 The offer included an unwaiveable condition that Lyttelton Port declared and paid a dividend of 20 cents per Lyttelton Port share prior to the offer closing.
 Takeovers Code (Ormiston Surgical & Endoscopy Limited) Exemption Notice 2011.