Allied Domecq Plc and/or Millstream Equities Limited
Published 6 July 2001
BEFORE THE TAKEOVERS PANEL
IN THE MATTER OF
the Takeovers Act 1993 and the Takeovers Code
IN THE MATTER OF
a meeting held under s 32 of the Takeovers Act 1993 to determine whether ALLIED DOMECQ PLC and/or MILLSTREAM EQUITIES LIMITED may have acted or may not be acting or may intend not to act in compliance with the Takeovers Code.
6 July 2001
D O Jones (Acting Chairperson)
J G Miles QC, A Ross and M Ryan For Allied Domecq Plc and Millstream Equities Ltd
G Curry, JPH Oldfield and M Peters For Lion Nathan
P Heath QC as counsel assisting the Panel
J Strowger, J Mussared (as representatives of Allied Domecq/Millstream Equities)
6 July 2001
A duly convened meeting of the Panel was held on Sunday, 1 July 2001 at 9.30 am by way of teleconference. The purpose of the meeting was to consider whether Allied Domecq Plc may not have acted, or may not be acting, or may intend not to act in compliance of the Takeovers Code [the Code] in relation to its reported intention to increase the voting rights it controlled in Montana Group (NZ) Ltd [Montana] in excess of its current entitlement, otherwise than in accordance with the Code.
The Notice of Meeting was given by Mr Jones as acting Chairperson of the Panel because the Chairperson of the Panel, Mr King, had previously notified Mr Jones that he considered it not proper or desirable for him to participate in any determination required to be made by the Panel in relation to or arising from the business of the meeting. Mr Jones directed that the powers of the Panel in relation to the meeting and any matter arising from the meeting be exercised by a division of the Panel consisting of the members set out above.
The meeting on 1 July 2001 was called because of a Reuters report which appeared on Friday, 29 June 2001. It had also been reported in the media that Allied Domecq Plc [Allied Domecq] had “irrevocably" promised to buy up to 50.08 million shares, or 23 per cent of Montana for $4.80 per share and that that promise was intended to "immunise" Allied Domecq from the need to comply with the Code. It was necessary for the Panel to "consider" whether Allied Domecq may not have acted or may not be acting or may intend not to act in compliance with the Code in relation to that “irrevocable promise". At its meeting the Panel noted that the issue appeared to turn on the meaning of a savings provision (s 23(b)) contained in the Takeovers Act 1993 [the Act]. The Panel determined to appoint Mr Paul Heath QC of Hamilton as counsel to assist the Panel on this matter.
During the course of the teleconference members of the Panel noted that Montana was a company subject to the Code and that media reports suggested that the proposed acquisition of Montana shares by or on behalf of Allied Domecq would not be undertaken in accordance with the provisions of the Code. The Panel determined to seek legal advice on the possible application of s 23(b) of the Act from Mr Heath. The meeting was adjourned until 5.15 pm to allow Mr Heath to consider the issues and advise the Panel on the issues raised.
The teleconference resumed at 5.15 pm after advice had been received from Mr Heath. In addition to the advice given by Mr Heath, the following information was available to members of the Panel:
1. A copy of a substantial security holder's notice filed with the New Zealand Stock Exchange by Chapman Tripp on behalf of Millstream Equities Ltd [Millstream Equities].
2. A copy of the Memorandum of Terms of an oral agreement which was attached to the substantial security holder's notice.
3. A copy of a further notice issued to the Stock Exchange in respect of the existence of option deeds between Millstream Equities Ltd and Millstream Ventures Ltd.
4. Copies of market announcements made by Montana.
5. A copy of a media release by Lion Nathan Ltd [Lion Nathan] commenting on the findings of the New Zealand Stock Exchange Standing Committee of 29 June 2001.
6. Copies of various newspaper articles, in particular an article published in the New Zealand Herald on 30 June 2001.
The Panel had been able to ascertain, from company searches, that Millstream Ventures Ltd had been incorporated on 29 June 2001 and was a wholly owned subsidiary of Millstream Equities. In turn the Panel is told that Millstream Equities is a wholly owned subsidiary of Allied Domecq.
The advice given to the Panel by Mr Heath was that if any shareholders of Montana had accepted an oral offer made on behalf of Millstream Equities Ltd to acquire shares in Montana before midnight on 30 June 2001 that concluded contract for the purchase of securities would fall within the provisions of s 23(b) of the Act. But, if the "irrevocable promise" stood alone after midnight on 30 June 2001 (when the Code came into force) it would appear not to be covered by s 23(b) of the Act. While announcements to the Stock Exchange also referred to an "oral agreement" there was no disclosure of the parties to the alleged oral agreement. On that basis, Mr Heath advised that, on the information available to him, the "irrevocable promise" appeared to be no more than an "offer" to which s 23(b) had no application.
The Panel noted that there had been no statement issued by either Allied Domecq or Millstream Equities to contradict information published in the New Zealand Herald on either 29 or 30 June 2001.Having deliberated upon the information available to it and the legal advice received, the Panel resolved on the evening of 1 July 2001:
A decision was made to hold a meeting under s 32 of the Act at 10 am on 6 July 2001. That date was chosen as the Panel was mindful that other parties could seek leave to be heard at the meeting; the Panel decided to allow sufficient time to enable any such applications to be made, heard and determined in accordance with the principles of natural justice.
The Panel resolved to issue a notice of meeting to Allied Domecq and Millstream Equities. The Panel determined that the s 32 meeting would be held in private.
The Panel also decided to make an order under s 32(2) of the Act restraining Millstream Equities from acquiring securities or any interest in or rights relating to securities in Montana unless in compliance with the Code. The effect of this order was to restrain Millstream Equities from acting on the irrevocable promise to acquire shares but to permit Millstream Equities to continue to acquire shares provided it complied with the Code. The Panel's view was that Millstream Equities could not revoke its “irrevocable promise" (a contradiction in terms) while it held the view that the promise was a legal technique which could protect it from compliance with the Code. Thus, a restraining order was necessary to ensure that and Millstream Equities did not increase its voting rights in Montana shareholding through the "irrevocable promise" and, consequentially, Allied Domecq did not increase the voting rights it controlled in Montana pending determination of the issue by the Panel.
Notice of the proposed s 32 meeting was given to both Millstream Equities and Allied Domecq through their Auckland solicitors, Chapman Tripp, on 1 July 2001. Before the formal notice was given by facsimile late last Sunday night Mr Jones telephoned Mr Strowger of Chapman Tripp to advise him of the determinations and orders made. A request was made for the Panel to meet with Mr Strowger immediately. Having considered that request and taken legal advice from counsel assisting the Panel formed the view that it would be inappropriate to meet with Mr Strowger at that time.
The formal notice of the s 32 meeting advised both Millstream Equities and Allied Domecq that the meeting would be held at 10 am on 6 July 2001 at a venue in Auckland set out in the notice. The Panel invited both Millstream Equities and Allied Domecq to present information to it which would enable the Panel to make a determination after the meeting whether it was or was not satisfied that Allied Domecq or Millstream Equities had acted, were acting or intended to act in compliance with the Code. Formal notice of the restraining order made under s 32(2) of the Act was given contemporaneously. The formal notice made it clear that the order was to expire at 5 pm on Sunday 8 July 2001.
The decisions of the Panel were communicated to the media at 10.58 pm on 1 July 2001 by facsimile. The Panel decided that it was appropriate to issue a press release at that late hour so that the market would be fully informed, prior to the opening of the market on 2 July 2001, of the matters considered and order made by the Panel. The Panel was concerned to ensure that any shareholder in Montana who may have intended to "accept" the "irrevocable promise" should be fully informed of the decision taken and order made.
On 2 July 2001 the Panel received from solicitors for Lion Nathan an application for leave to appear at the s 32 meeting; that application was made in reliance on s 10(2) of the Act. On 3 July 2001 the Panel forwarded a copy of that letter to Allied Domecq and Millstream Equities through their solicitors and gave to them an opportunity to comment on the request. It was indicated that if Allied Domecq or Millstream Equities objected to the granting of leave for Lion Nathan to appear, full reasons for that objection should be made available to the Panel by midday on 4 July 2001. Millstream Equities and Allied Domecq were also advised that if they did object, their objection (and reasons in support) would be sent immediately to the solicitors for Lion Nathan who would be requested to reply by 6 pm on 4 July 2001. It was indicated that any reply would be copied to Millstream Equities and Allied Domecq. It was noted that the Panel would decide the question of leave on the papers after considering all information received and that the parties would be advised of that decision as soon as possible thereafter. A copy of that letter was sent to the solicitors for Lion Nathan.
The Panel received written submissions on the leave question from both the solicitors for Allied Domecq/ Millstream Equities and Lion Nathan. Having considered those submissions, the Panel decided that it would be assisted by receiving submissions from counsel for Lion Nathan on the issues raised under s 23(b) of the Act. That view was communicated to the solicitors on the morning of 5 July after a duly convened meeting of the Panel had made that decision. Counsel for Lion Nathan were required to submit their submissions to the Panel and to the solicitors for Allied Domecq/Millstream Equities before 4.00 pm on 5 July so that the Panel and Allied Domecq/Millstream Equities could consider the issues raised overnight. A copy of submissions received on behalf of Allied Domecq/Millstream Equities by the Panel on 4 July were forwarded to counsel for Lion Nathan to consider.
Meeting on 6 July 2001
The s 32 meeting was held in Auckland on 6 July 2001.
At the meeting the Panel heard from counsel for the parties who, for over three hours, spoke to and were questioned on their written submissions. In addition the Panel had the benefit of clarifying certain factual matters with both Mr Strowger and Ms Mussared. The Panel thanks counsel for their detailed submissions on the issues covered at the meeting. The Panel notes that a full transcript of the oral argument has been taken and will be available to the parties and counsel in due course, on request.
Given the need for the Panel to issue a prompt decision and the fact that a full transcript of oral submissions was taken, the Panel does not propose to discuss the competing contentions. Instead, the Panel prefers to set out its views on the issues and provide a brief summary of its reasons for reaching its view. The Panel will, first, summarise the factual matters put before it and then address the legal issues raised.
What, in fact, was the "irrevocable promise"?
The Panel takes for its summary of the factual matters relating to the "irrevocable promise" the summary set out in paragraph 6 of the submissions of counsel for Allied Domecq/Millstream Equities made available to us on 4 July. Paragraph 6 of the submissions states:
The facts are simple. At 8.50 am on 29 June 2001, Millstream Equities Ltd entered into an oral contract with John Strowger, (who is also a shareholder in Montana), upon the following terms:
(i) Mr Strowger would pay Millstream Equities $100.00
(ii) in consideration of the payment, Millstream gave an irrevocable promise to buy from Mr Strowger, and any other persons at the time of the contract or prior to 16 August 2001 holding shares in Montana Group (NZ) Limited, up to a maximum aggregate of 50,081,000 shares in Montana;
(iii) the price would be NZ$4.80 per share, or in the event of a share split, bonus or other capital reconstruction of Montana, the economic equivalent of that price;
(iv) the price would be reduced by the amount of any dividend declared if any;
(v) Millstream would buy such shares, up to the maximum amount stated, on a first come first served basis;
(vi) Millstream's obligation to buy shares would expire at 5 pm on 16 August 2001;
(vii) any shareholder wishing to exercise its right to compel Millstream to purchase shares could do so by contacting Montana at its registered office;
(viii) settlement would occur by delivery by a shareholder to Millstream's registered office of a registerable securities transfer form and the production to Millstream's registered office of the shareholders' FIN and shareholder number details at least one day prior to settlement to allow Millstream to undertake prior verification of title;
(ix) Millstream would pay the purchase price on settlement;
(x) the offer is intended to, and on acceptance would, confer a benefit on those persons who hold shares in Montana at the date of the contract or at any time prior to 16August 2001. If the offer were to be accepted, Millstream would be under an obligation enforceable at the suit of any such person to perform that promise.
On questioning it became clear that Mr Strowger acquired his shares in Montana, through the market, on 28 June 2001, the day before the "irrevocable promise" was announced.
It should be noted that Mr Strowger is a member of the firm of solicitors advising Allied Domecq/Millstream Equities in relation to this matter.
Also placed before the Panel was a declaration of Mr Philip Bowman of London, who is the Chief Executive Officer of Allied Domecq and a director of Millstream Equities. That declaration corroborated the description of the oral agreement reached between himself and Mr Strowger as summarised above.
The discussion between Mr Strowger and Mr Bowman took place by telephone. A tape recording of the discussion was made. A copy of the tape and a transcript of the discussion were produced to the Panel. It is clear from the information confirmed to the Panel by Allied Domecq at the meeting that the "oral agreement" was reached with the intention not only of ensuring that any acquisition of securities by Millstream Equities on or after 1 July 2001 pursuant to the "irrevocable promise" would not breach the Code, but also to enable Millstream Equities to increase its holding without meeting the 50 per cent threshold required by the Code.
"Irrevocable promise" - Legal Issues
At the commencement of the meeting Mr Miles QC (for Allied Domecq/Millstream Equities) accepted that the issue for the Panel's determination was whether the arrangement fell within s 23(b) of the Act.
Further, he accepted that if the Panel took the view that the arrangement did not fall within that provision that the arrangement would not be compliant with the Code.
The Panel's first task is to consider the scope of the exception from compliance with the Code created by s 23(b) of the Act. In the Panel's view the legislative intention is clear: it was to exempt from compliance with the Code acquisitions of securities resulting from
a. contractual obligations actually incurred by the buyer prior to 1 July 2001 or
b. the exercise, by a buyer, of rights which arose prior to 1 July 2001, to acquire shares
The Code came into force on 1 July 2001 [Rule 2 of the Code]. Rule 5 of the Code prevents relevant parties from contracting out of the provisions of the Code. Section 23(b) must be addressed in that context given that it is intended to operate as a savings provision only.
There are two limbs to s 23(b). The first limb protects acquisitions of shares pursuant to contractual obligations incurred before 1 July 2001 but completed on or after that date. The second limb protects the acquisition of shares pursuant to any rights to acquire shares which came into existence before 1 July 2001 but settled on or after that date (e.g. an option to buy).
In respect of the second limb, in order to come within s 23(b) any acquisition of shares by Millstream Equities on or after 1 July 2001 must be made pursuant to the exercise of a right acquired by Millstream Equities prior to 1 July 2001. Based on the information available to the Panel, the Panel considers that Millstream Equities possessed no right to acquire shares in Montana before 1 July 2001 by virtue of the "irrevocable promise".
The only right that has been acquired is that granted to the Montana shareholders by Millstream Equities (pursuant to the "irrevocable promise" and the Contracts (Privity) Act 1982) to sell their shares to Millstream Equities if they chose to accept the offer constituted by the "irrevocable promise".
On any view, there is no right acquired before 1 July 2001 which can be exercised by Millstream Equities. Accordingly, Millstream Equities cannot rely on the second limb.
To come within the first limb Millstream Equities must demonstrate that any acquisition of shares after 1 July 2001 is made pursuant to a contractual obligation to buy shares incurred before 1 July 2001.The facts show that Millstream Equities did incur an obligation to acquire shares from Mr Strowger pursuant to the oral agreement between Mr Strowger and Millstream Equities. There is no evidence of any other contract between Millstream Equities and any other shareholder of Montana entered into before 1 July 2001. Neither is there any evidence of any other contractual obligation incurred by Millstream Equities.
Therefore, the question whether the first limb is met turns on whether the ability of a shareholder of Montana to enforce (on or after 1 July 2001) the promise made by Millstream Equities to buy the shareholder’s shares (under the Contracts (Privity) Act 1982) can properly be characterised as a “contractual obligation incurred" by Millstream Equities before 1 July 2001.
The Contracts (Privity) Act 1982 was passed to confer rights, in certain circumstances, on a person who is not a party to a contract, to enforce a benefit extended to him or her by that contract. The right for such a person to sue to enforce such a right did not previously exist at common law.
The Long Title to the Act states that it was enacted:
"... to permit a person who is not a party to a... contract to enforce a promise made in it for the benefit of that person." (Long Title to the Act).
It is significant, in the Panel's view, that ss 6, 7 and 8 of the 1982 Act refer to an obligation imposed by s 4 of the Act rather than to a contractual obligation. It is also significant that s 4 refers to conferment of a benefit on a described person who is "not a party" to the contract. The reason why the Contracts (Privity) Act was passed was, in fact, to confer a right on a person who was not a party to a contract to sue for an obligation which was not regarded by the law as a contractual obligation. The references in the provisions of the Contracts (Privity) Act to statutory obligations underscore that point.
Returning to s 23(b) of the Act, the Panel is of the view that the words "contractual obligation incurred" were used deliberately so that an obligation must flow from a contract (enforceable as between the identified parties to it) which came into existence before 1 July 2001. By virtue of s 23(b), once a pre-1 July 2001 contractual obligation existed it could be performed (on or after 1 July 2001) without being compliant with the Code.
The Panel is of the view that an arrangement of the type adopted by Millstream Equities in this case was never contemplated by Parliament as being the type of transaction which would receive the benefit of s 23(b) exemption from the Code.
The arrangement, in truth, is no more than an offer clothed as a contractual obligation through the use of language derived from the Contracts (Privity) Act. In the Panel's view, Parliament intended all such offers to be compliant with the Code on and after 1 July 2001.
The Panel holds that the "irrevocable promise", in so far as it is enforceable by shareholders of Montana other than Mr Strowger, creates an obligation which is statutory in nature rather than contractual and therefore falls outside the ambit of s 23(b).
Matters for Determination
Under s 32(3) of the Act the Panel may make a determination after a s 32 meeting that it is satisfied or not satisfied that a person has acted, is acting or intends to act in compliance with the Code.
It was confirmed to the Panel at the meeting that Millstream Equities has not acquired any shares under the "irrevocable promise" but that in the absence of a restraining order Millstream Equities would seek to acquire shares in consequence of that promise.
Having held that the oral agreement detailed earlier in this determination is not exempted from compliance with the Code by virtue of s 23(b) of the Act the Panel determines that it is not satisfied that Allied Domecq/Millstream Equities intends to act in compliance with the Code.
Although the "irrevocable promise" was made only by Millstream Equities, any acquisition of shares by Millstream Equities will render Allied Domecq in breach of the Code because, by virtue of that acquisition, Allied Domecq will increase the voting rights held in Montana controlled by it, in breach of the Code. Thus, the Panel has determined that it is not satisfied that both Allied Domecq and Millstream Equities intend to act in compliance with the Code.
Having made a determination under s 32(3) of the Act, the Panel must consider whether to make a new restraining order or to continue the existing restraining order.
Having considered the various matters put by counsel, the Panel is of the view that it should make an order which continues the existing restraining order for a period of 21 days, being the maximum period permitted by the Act. It is satisfied that there are no market considerations which would make it inappropriate to continue the restraining order.
Accordingly, the Panel continues the restraining order made on 1 July 2001 for a period of 21 days from today's date in terms of s 32(4) of the Act.
Counsel's attention is drawn to the Takeovers (Fees) Regulations 2001 (SR 2001/60). Having regard to its findings, the Panel is minded to make an order for costs against Allied Domecq/Millstream Equities. The Secretary to the Panel will make available to the solicitors for Allied Domecq/Millstream Equities a schedule of relevant costs as soon as possible. Once that schedule has been prepared and provided, the Panel will request submissions from the solicitors for Allied Domecq/Millstream Equities on whether, and if so to what extent, costs should be ordered.
DATED at Auckland this 6th day of July 2001
SIGNED for and on behalf of the Panel by the Acting Chairperson
DAVID OLIVER JONES