Oyster Bay Marlborough Vineyards Limited - Reasons for Determination
Published 20 September 2005
BEFORE THE TAKEOVERS PANEL
IN THE MATTER OF
the Takeovers Act 1993 and the Takeovers Code
IN THE MATTER OF
a meeting held under section 32 of the Takeovers Act 1993 to determine
Whether Oyster Bay Marlborough Vineyards Limited ("Oyster Bay") acted other than in compliance with the Takeovers Code ("the Code") by not including in the target company statement dated 19 July 2005 issued in response to the partial takeover offer made by Delegat's Wine Estate Limited ("Delegat's") dated 7 July 2005 ("the TCS"), information relating to the market value, encumbered and unencumbered, of Oyster Bay's freehold and leasehold vineyards thereby omitting information about the assets and financial affairs of Oyster Bay that could reasonably have been expected to be material to the making of a decision by Oyster Bay's shareholders to accept or reject the Delegat's offer.
20 September 2005 at Wellington
A Lawrence (Acting Chairman)
R Fardell QC and N Scott appearing for Oyster Bay;
W J Falconer representing William John Falconer, Ross Barry Keenan and the Hon Ruth Richardson, and on behalf of the committee of independent directors of Oyster Bay;
22 September 2005
STATEMENT OF REASONS:
26 September 2005
 Oyster Bay is a New Zealand incorporated company based in Auckland and is party to a listing agreement with New Zealand Exchange Limited ("NZX"). As such, it is a code company for the purposes of the Takeovers Act 1993 ("the Act") and the Takeovers Code ("the Code").
 Oyster Bay owns and leases vineyards in Marlborough. It was incorporated in 1999 to own vineyards and supply premium grapes to Delegat's.
 Oyster Bay undertook an initial public offering ("IPO") of 9 million shares in 1999 at an issue price of $2.00 per share, to raise $18 million to fund the purchase from Delegat's Group Limited ("Delegat's Group") of Airfields Vineyard Limited ("Airfields") and its development, and the purchase from Delegat's Group of Gifford's Creek Limited ("Gifford's Creek"), to pay for capital expenditure, the IPO expenses and to provide working capital. The purchase price for Airfields was based on the unencumbered market freehold value of Airfields (that is no allowance was made for the long term contacts (as defined in paragraph 7, below)).
 The Oyster Bay vineyards comprise the Airfields and Gifford's Creek properties, some 301 hectares of freehold land of which 257 hectares is planted primarily in Sauvignon Blanc and Chardonnay varieties (with smaller plantings in other varieties) ("the Oyster Bay Vineyards"). The Oyster Bay Vineyards are situated on State Highway 63 on the Wairau plains, approximately 16 kilometres west of Blenheim.
 In 2002 Oyster Bay acquired the Fault Lake Vineyard, comprising 43 hectares of freehold land and 128.3 hectares of leasehold land (leased from Murray Downs Limited). It has been developed since its acquisition and is primarily planted in Sauvignon Blanc (with recent plantings in other varieties). The Fault Lake Vineyard is situated approximately 14 kilometres west of Blenheim.
 In 2002 Oyster Bay entered into a long term lease agreement to lease 158 hectares of land from the Marlborough District Council to develop the Wairau River Vineyard. It is situated at the end of Fareham Lane in the WairauValley and its development is now completed.
 In conjunction with the establishment of Oyster Bay, the IPO and the purchase by Oyster Bay of the Airfields and Gifford's Creek properties, Delegat's Group, Delegat's and Oyster Bay entered into a number of long term agreements, with the following group of three being of particular relevance (together "the long term contracts"):
(a) Long Term Co-operation Agreement dated 13 May 1999 and varied on 27 February 2002 and 14 May 2002 ("the LTCA");
(b) Grape Purchase Agreements dated 13 May 1999 (in respect of the Oyster Bay Vineyards), 27 February 2002 (in respect of the Fault Lake Vineyard), and 14 May 2002 (in respect of the Wairau River Vineyard) (together "the Grape Purchase Agreements"); and
(c) Vineyard Management and Administration Agreements dated 13 May 1999 (in respect of the Oyster Bay Vineyards), 27 February 2002 (in respect of the Fault Lake Vineyard), and 14 May 2002 (in respect of the Wairau River Vineyard) (together "the Vineyard Management Agreements")
 The terms of the LTCA include that:
- Oyster Bay can operate only the business of owning vineyards and growing grapes.
- Oyster Bay's vineyards cannot be sold without the consent of Delegat's, (such consent must not be unreasonably withheld).
- The transferee must accept Delegat's rights and obligations to manage the vineyards and buy the grapes. Delegat's also has a right of first refusal to a sale or lease of Oyster Bay's vineyards and if Delegat's refuses an offer and another party accepts it the offer must be made again to Delegat's on the same terms agreed with any third party.
- Delegat's can unilaterally extend the Vineyard Management Agreements and Grape Purchase Agreements for further periods of ten years: in relation to the Oyster Bay Vineyards up until 30 June 2049, Fault Lake Vineyard up until 31 March 2061, and Wairau River Vineyard up until 31 March 2067. Delegat's can extend thereafter with the written consent of all parties (being Oyster Bay, Delegat's and Delegat's Group).
- the LTCA remains in force so long as the Grape Purchase Agreements and Vineyard Management Agreements remain in force.
- Delegat's must certify each year as to the health of its financial position.
 The terms of the Grape Purchase Agreements include that:
- Oyster Bay will sell all of the grapes it produces to Delegat's and only to Delegat's while the agreement lasts.
- Either Oyster Bay or Delegat's can terminate the agreement immediately by written notice if one of the parties proposes or resolves to be dissolved (except in an amalgamation), the receivers are called in, the business of one of the parties substantially ceases (except in relation to an amalgamation), a scheme of arrangement is entered into by one of the parties with its creditors, on the insolvency of one of the parties, or where a material breach of the Grape Purchase Agreements has occurred which cannot be remedied.
- Oyster Bay can terminate the agreement immediately by notice in writing if Delegat's fails to certify its long term viability by 31 December each year (as required in the LTCA), or if Oyster Bay holds a reasonable opinion that the financial position of Delegat's has deteriorated to the point that it is unable to fulfil its obligations.
- Oyster Bay can terminate the agreement from the next following 30th of June if Delegat's ceases to hold a minimum of 20% of the shares in Oyster Bay and does not acquire back up to 20% within 60 days of receiving notice from Oyster Bay of the reduction in shareholding ("notification").
- The agreement terminates automatically, along with the LTCA, if the Vineyard Management Agreements terminate for any reason.
- Either party can terminate immediately if no grapes are produced by Oyster Bay for three consecutive years.
 The terms of the Vineyard Management Agreements include that:
- Delegat's administers Oyster Bay (the company), and manages all the vines and vineyards, with all services to be provided by employees of Delegat's with the assistance of input from an Independent Viticultural Consultant.
- Oyster Bay may terminate if:
- there have been three consecutive decisions against Delegat's by an independent expert or arbitrator in the dispute resolution procedure set out in the agreement;
- Delegat's holds less than 20% of the shares issued by Oyster Bay and fails to increase its shareholding back to 20% within 60 days of notification;
- in the reasonable opinion of Oyster Bay there is a deterioration in the long term outlook of the business of Delegat's or its financial position, which may result in Delegat's being unable to fulfil its obligations under the agreement; or
- there is a change of control in Delegat's Group and the entity who gains control will not confirm that it will adhere to the philosophies and commitments of the agreements between Oyster Bay and Delegat's.
- The agreement terminates immediately on termination of the Grape Purchase Agreements.
- Either Delegat's or Oyster Bay can terminate the agreement immediately by notice in writing if either is dissolved, the receivers are called in and so on in the same way as in the Grape Purchase Agreements.
 On 26 November 2004 Oyster Bay adopted a new constitution under the Companies Act 1993 ("the constitution"), which, inter alia, restricted the activities of Oyster Bay (on materially the same terms as those in the LTCA) to the owning of vineyards and growing of grapes. In addition, the constitution placed materially the same restrictions on Oyster Bay's capacity to sell or lease the properties owned or leased by Oyster Bay as those in the LTCA.
 On 7 June 2005 Peter Yealands Investments Limited ("PYIL") made a partial offer for 47.64% of the voting securities in Oyster Bay that it did not already hold or control ("the PYIL offer"). On 7 July 2005 Delegat's made a partial offer for 25.98% of the voting securities in Oyster Bay that it did not already hold or control ("the Delegat's offer"). After a series of variations by PYIL and Delegat's to their respective offers, both PYIL and Delegat's were offering $4.00 per Oyster Bay share.
 On 19 July 2005 Oyster Bay issued its TCS in response to the Delegat's offer. The TCS included an independent adviser's report prepared by Ferrier Hodgson & Co ("Ferrier Hodgson") as required under rule 21 of the Code ("the Ferrier Hodgson report"). The Ferrier Hodgson report adopted a discounted cash flow ("DCF") as the valuation methodology for assessing the value of Oyster Bay. It sought to test that valuation with a net tangible asset calculation ("NTA") as a supporting valuation methodology.
 The Ferrier Hodgson report made its own DCF valuation of Oyster Bay's shares which fell within the range of $2.39 to $3.15 per share.
 The Ferrier Hodgson report provided a brief discussion on the NTA value of Oyster Bay. It summarised property valuations (which Oyster Bay made available to Ferrier Hodgson) undertaken by Logan Stone Limited ("Logan Stone") in July 2004 on an income, or DCF basis, as showing a total value of the Oyster Bay, Fault Lake and Wairau River Vineyards of some $45 million, thus providing an income based NTA per Oyster Bay share, as at 31 December 2004, of $3.26.
 The Ferrier Hodgson report concluded that, while the Logan Stone income based valuation was higher than their own DCF valuation, this could only be achieved on a break-up of Oyster Bay's assets. Therefore, the Ferrier Hodgson report concluded that Ferrier Hodgson's DCF valuation was the appropriate valuation to be adopted.
 The Ferrier Hodgson report summarised the key terms and conditions of the long term contracts and various other contractual arrangements between Oyster Bay and Delegat's.
 Paragraph 20 of the TCS is headed "Asset Valuation". It refers, as it is required to do under the Code, to the availability of Logan Stone's valuation reports. Paragraph 20.1 refers to the valuation and then states:
... The valuation is on the basis of a stand-alone vineyard and not part of a larger going concern wine company or vineyard portfolio. Due to a long term co-operation agreement being in place between Oyster Bay and Delegat's the determinate of a fair value is only obtainable by use of a discounted cash flow model.
 On 9 August 2005 Delegat's filed a substantial security holder notice indicating that the Delegat's offer's minimum acceptance condition (requiring acceptances to the offer that, when taken together with the voting securities already held or controlled by Delegat's, conferred on Delegat's 50.1% of the voting rights in Oyster Bay) had been satisfied.
 Later on 9 August 2005 the Panel received a complaint from PYIL alleging, inter alia, that the TCS had failed to disclose information relating to the quality of the grapes produced by Oyster Bay and the prices paid by Delegat's for those grapes ("the grape harvest information"), in breach of specified clauses of Schedule 2 of the Code ("PYIL's first complaint"). The Panel summonsed documents and sought comments from Oyster Bay in relation to the PYIL complaint. Following consideration of the information, the Panel decided, on 14 September 2005, to take no further action in respect of the grape harvest information. For the purposes of this determination, therefore, PYIL's first complaint and the grape harvest information are referred to no further. The Panel notes that it has always been open to PYIL to formally request the Panel to hold a meeting under section 32 of the Act to determine its first complaint but PYIL has not done so.
 On Friday 12 August 2005 the Panel received a complaint (dated 11 August 2005) from Mr David Rankin, a substantial shareholder in Oyster Bay, alleging that the TCS understated the potential NTA value of Oyster Bay. This understatement was caused by using as the basis for the NTA valuation the reports prepared by Logan Stone that use income based assumptions in relation to Oyster Bay's vineyard assets under the long term contracts rather than an unencumbered market value of the vineyard assets.(2) Mr Rankin asserted in his complaint that Oyster Bay's vineyard assets had a market value, without the long term contracts in place, in the order of $90 million, resulting in an increase of the NTA of some $5.00 per Oyster Bay share, to above $8.00 per share.
 On Wednesday 17 August 2005 the Panel received a further complaint from PYIL alleging that the Ferrier Hodgson report used Logan Stone's income based DCF valuation as the basis of its NTA valuation of $3.26 per Oyster Bay share and, therefore, did not provide Oyster Bay shareholders with an independent appraisal of the market value of Oyster Bay's vineyard assets ("PYIL's second complaint").
Initial actions by the Panel
 Following receipt of Mr Rankin's complaint, the Panel convened a meeting on Friday 19 August 2005. PYIL's second complaint was received two days before that meeting and was considered also by the Panel on 19 August 2005. It was decided to put the complaints to Oyster Bay and Ferrier Hodgson and to seek their comments on the allegations. Delegat's, as an interested and potentially affected party, dependent upon the outcome of the inquiry, was also invited to comment on the complaints if it wished to do so.
 The Panel convened a number of further meetings and requested additional information from Oyster Bay (some of it under summons) in relation to the valuation of Oyster Bay's freehold and leasehold vineyards.
 The Panel convened a further meeting on Wednesday 14 September 2005 and decided that the information provided by Oyster Bay about the market value of Oyster Bay's vineyard assets, not included in the TCS, may have constituted material information to Oyster Bay shareholders' decisions as to whether to accept or reject the Delegat's offer. At the meeting the Panel passed the following resolution:
On or about 19 July 2005 Oyster Bay Marlborough Vineyards Limited ("Oyster Bay") issued a target company statement in response to the partial takeover offer dated 7 July 2005 made by Delegat's Wine Estate Limited ("Delegat's") for 25.98% of the voting securities in Oyster Bay that Delegat's did not already hold or control ("the target company statement"). The target company statement included an independent adviser's report from Ferrier Hodgson & Co prepared under rule 21 of the Takeovers Code.
On 9 August 2005 Delegat's filed a substantial security holder notice disclosing that its offer had received sufficient acceptances to take the Delegat's control percentage in Oyster Bay above the minimum acceptance level of 50.1%. Further acceptances have since been received. The Delegat's offer is scheduled to close on 19 September 2005.
Later on 9 August 2005 the Panel received a complaint from Peter Yealands Investments Limited ("PYIL") alleging that Oyster Bay was in breach of its obligations under specified clauses of Schedule 2 of the Code by failing to disclose certain information in the target company statement that could reasonably be expected to be material to the making of a decision by Oyster Bay's shareholders to accept or reject the Delegat's offer. The information related to the quality of the grapes produced by Oyster Bay, and the prices paid by Delegat's for grapes produced by Oyster Bay and sold to Delegat's under long-term grape purchase agreements ("the grape harvest information"). PYIL further alleged that this is material information without which the target company statement is misleading, and which should have been disclosed in the target company statement. The Panel summonsed appropriate documents and records and sought comments from Oyster Bay. Following consideration of the information the Panel has decided to take no further action in respect of PYIL's complaint regarding the grape harvest information.
On 12 August 2005 the Panel received a complaint from Mr David Rankin, a shareholder in Oyster Bay, alleging that the target company statement understated the potential net tangible asset value of Oyster Bay by using as the basis for that valuation various valuation reports prepared by Logan Stone Limited that use the income-earning capacity of Oyster Bay's vineyard assets under long-term grape purchase agreements, and by not disclosing the market value of the vineyard assets. On 17 August 2005 the Panel received a further complaint to similar effect from PYIL. The directors of Oyster Bay submitted that there is no market for encumbered vineyard property, and that the inclusion of information about a market value, encumbered or unencumbered, for Oyster Bay's vineyard assets would have been irrelevant and potentially misleading because in their view Oyster Bay cannot sell its vineyard assets on an unencumbered basis as a consequence of its contractual obligations to Delegat's.
The target company statement did not include any reference to information about the market value, encumbered or unencumbered, of Oyster Bay's freehold and leasehold vineyards. The Panel considers that this information, notwithstanding that such information would have had to have been very fully and carefully explained, may have constituted information about the assets and financial affairs of Oyster Bay that could reasonably have been expected to be material to the making of a decision by Oyster Bay's shareholders to accept or reject the Delegat's offer for the purposes of clauses 18(5) and 24 of Schedule 2 of the Code. As a consequence of the omission of this information from the target company statement the Panel considers Oyster Bay may not have acted or may not be acting in compliance with the Takeovers Code.
The Panel made interim restraining orders under section 32(2) of the Takeovers Act 1993:
1. directing Delegat's not to declare its offer unconditional; and
2. directing Oyster Bay not to register the transfer or transmission of any securities arising from acceptances of the Delegat's offer.
These restraining orders are due to expire at the close of Thursday 22 September 2005. These orders are intended solely to preserve the status quo pending resolution of the matter.
 On 14 September 2005 the Panel gave notice of its intention to hold a meeting under section 32 of the Act on Tuesday 20 September 2005 in Wellington.
 Summonses were issued under section 31N of the Act requiring the attendance at the meeting of Mr Falconer, Mr Yealands, Mr Rankin, either of Messrs Panckhurst or Graham of Ferrier Hodgson, and Mr Gross of Logan Stone. In addition, documents were summoned from Ferrier Hodgson and Logan Stone relating to the valuation of Oyster Bay's vineyard assets.
 The Panel invited the following parties to attend the meeting, if they wished: Ms Christine Pears (as the person fulfilling the role of Chief Financial Officer of Oyster Bay (and Ms Pears is also the Chief Financial Officer of Delegat's)), the Hon Ruth Richardson and Mr Ross Keenan (as independent directors of Oyster Bay) and Mr Jakov Delegat (in his dual capacities as the person fulfilling the role of Chief Executive Officer of Oyster Bay and as a director of Delegat's). Mr Delegat accepted this invitation.
 The parties were requested to provide written submissions to the Panel by 9.00 a.m. on Monday 19 September 2005.
 Submissions were received by the requested time from or on behalf of Oyster Bay, PYIL, Mr Rankin and Delegat's. In addition, statements of evidence were received from Mr Yealands and Mr Hancox. The submissions and statements of evidence were exchanged between all the parties that had provided submissions.
 The documents that were sought under summons were provided to the Panel on Monday 19 September 2005. The Panel appreciated the early provision of these documents.
 During the Panel's meeting evidence was received under oath from Mr Rankin, Mr Yealands, Mr Hancox, Mr Gross, Mr Graham and Mr Falconer. Mr Delegat was invited to make a statement to the Panel and did so under oath. Legal submissions were made by the legal advisers and counsel to Mr Rankin, Mr Yealands, Delegat's and Oyster Bay.
The issue for the Panel to decide was whether information about the market value, encumbered and unencumbered, of Oyster Bay's vineyards constituted information about the assets and financial affairs of Oyster Bay that could reasonably have been expected to be material to the making of a decision by Oyster Bay's shareholders to accept or reject the Delegat's offer for the purposes of clauses 18(5) and 24 of Schedule 2 of the Code, and that its omission from the TCS was other than in compliance with the Code.
Relevant provisions of the Code
 Rule 46 of the Code requires a target company to send to the target company shareholders "a statement containing, or accompanied by, the information specified in Schedule 2 [of the Code]".
 Clause 18(5) of Schedule 2 requires the following to be included in the TCS:
Any other information about the assets, liabilities, profitability, and financial affairs of the target company that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.
 Clause 24 of Schedule 2 requires the following to be included in the TCS:
Any other information not required to be disclosed by this schedule that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.
Submissions from parties
 Submissions made on behalf of PYIL and on behalf of Mr Rankin alleged that the TCS was misleading (and omitted material information required by clauses 18(5) and 24 of Schedule 2 of the Code) in that it failed to disclose the difference of approximately $45 million between the value of Oyster Bay's vineyard assets calculated on an earnings basis (the value shown in the Ferrier Hodgson report in the TCS) and their "value" of some $90 million assessed on the basis of a market value of Oyster Bay's vineyard assets, were they to be unencumbered.
 Mr Rankin pointed out that with the long term contracts in place Oyster Bay's reported vineyard asset values were declining, and that this was shown in the valuations reported in Oyster Bay's 2001 and 2004 Annual Reports, in spite of considerable investment by Oyster Bay in developing the vineyards.(3) This was also occurring in a climate of rapidly rising value of planted vineyards in Marlborough during the same period.
 Mr Rankin said that he had invested in Oyster Bay because, as a valuer, he was attracted by the growth potential of an investment underpinned by rising property values. So far, the opposite has happened.
 PYIL submitted that the significant difference between unencumbered market value and DCF (ie encumbered value) being $45 million would have raised questions about the effectiveness of current management of Oyster Bay in respect of yields and prices achieved for the grapes and in terms of the operating costs of the vineyards.
 PYIL and Mr Rankin submitted that the statement in the TCS that the DCF model is the only way to obtain a fair value of Oyster Bay because of the long term contracts (see paragraph 18, above) was wrong because the long term contracts could be terminated by agreement and that Delegat's, as party to the contracts and the bidder, had the ability to unlock the value differential.
 PYIL and Mr Rankin submitted that if the differential in value had been made known to all Oyster Bay shareholders considering whether to accept or reject Delegat's offer, it would have resulted in some shareholders questioning whether Oyster Bay's association with Delegat's was in the best interests of Oyster Bay.
 Oyster Bay submitted that the independent directors of Oyster Bay could not have included in the TCS a statement of an unencumbered value of Oyster Bay's vineyard assets without also speculating as to the probability of the termination of the long term contracts, requiring an unreliable prediction based on unknown future circumstances. Such speculation would have been misleading, as it would imply to shareholders that potentially the margin between the income based encumbered value and unencumbered value could be secured by Oyster Bay at some point in the future. Oyster Bay submitted that there is no prospect of realising any such margin without Delegat's agreeing to the termination of the long term contracts. The independent directors could not, did not, and do not know whether Delegat's would ever reach that point during the life of those contracts. The independent directors were aware that security of grape supply was very important to Delegat's, which is currently building a new winery in Marlborough. The independent directors concluded that the prospect of Delegat's terminating the long term contracts was not a realistic possibility.
 Oyster Bay submitted that advice by the independent directors to shareholders on hypothetical scenarios that may never arise, and in respect of which the independent directors are not in a position to verify, cannot possibly be material information for the purposes of the Code. In Oyster Bay's view, to be material, the information must be reliable, informative and important. Speculative predictions by the independent directors would not meet these criteria.
 Oyster Bay was also of the view that there was no guarantee, in any event, that any unlocked value from the sale of the vineyards would ever be released to shareholders on a pro rata basis, as Delegat's would be expected to be paid the cost to it (loss of security of grape supply) of the early termination of the long term contracts. Therefore, Oyster Bay submitted, the independent directors had done the right thing by basing their comments in the TCS on the commercial and legal certainties.
 Mr Gross stated in evidence that a market valuation of Oyster Bay's encumbered (with long term contracts) vineyard assets could be justified as appropriate only if there was sufficient relevant market evidence to support such an approach. However, in recent years there has been a significant degree of vertical integration in the wine industry as the larger wineries sought security of grape supply, and the long term contracts would prevent a purchaser (other than Delegat's) from accessing Oyster Bay's grape supply. In his view it was not appropriate to start with a market-based value of Oyster Bay's unencumbered vineyard assets and then apply a discount to reflect the long-term contractual arrangements in place between Oyster Bay and Delegat's. On the assumption that the potential market pool was limited to investors, Mr Gross valued Oyster Bay's vineyard assets by reference to their income-earning capacity, which at 1 July 2004 was $45 million.
 The Panel was told that Logan Stone had been instructed by Ms Pears to prepare valuations. The Panel received from Oyster Bay among the documents obtained under summons signed valuations by Logan Stone dated July 2004 using a market value approach on an encumbered and unencumbered basis, in addition to the valuations prepared on the income based approach. The Panel was advised that while Logan Stone had undertaken valuation work for Oyster Bay since 1999, Mr Gross was undertaking this valuation for the first time. He indicated undertaking the market valuation of his own initiative in accordance with his usual practice. The combined market value of Oyster Bay's vineyard assets, freehold and leasehold, on an unencumbered basis at 1 July 2004 was $64.3 million. The combined market value of the properties on an encumbered basis at 1 July 2004 was stated at $50.2 million. Mr Gross's report did not detail how he had prepared his market value assessment of the encumbered land.
 These market-based valuations were not provided by Oyster Bay to Ferrier Hodgson when preparing its independent adviser's report, nor was there any dialogue between Ferrier Hodgson and Logan Stone.
 Mr Gross said that for 2005 he was instructed by Ms Pears to prepare valuations of Oyster Bay's vineyards on only the income based approach. However, he said that he always started such valuation exercises with an assessment of the properties' unencumbered market value, and it was on the basis of this work that he had been able to agree with Mr Rankin's broad assessment of $90 million as the value of Oyster Bay's unencumbered vineyards in June 2005.
 Mr Graham stated in evidence that Ferrier Hodgson based its NTA calculation of Oyster Bay's shares on income based valuations undertaken by Logan Stone in July 2004. These valuations clearly stated that due to the long term contracts with Delegat's it was appropriate to value Oyster Bay's vineyard assets by reference to their income-earning capacity. Mr Graham argued that Ferrier Hodgson was entitled to rely on Logan Stone as expert valuers. Mr Graham acknowledged that he had not seen Logan Stone's market-based valuations of Oyster Bay's vineyards. He said that, if he had, he would have regarded the unencumbered market value of Oyster Bay's vineyard assets as not relevant to the value of Oyster Bay's shares while the long term contracts were in place. In its role as independent adviser, Ferrier Hodgson had made enquiries of Delegat's regarding the long term contracts and as a result of these enquiries was satisfied that Delegat's had an ongoing commercial interest (security of grape supply) in ensuring that the contracts remained in place.
 It was pointed out to Mr Graham that the Ferrier Hodgson report was required to be a report on the merits of the offer, and not simply a valuation. It was suggested to him that in the wider context of a merits report on two competing offers the unencumbered market value of Oyster Bay's vineyards, highlighting as it did the value-diminishing effect of the long-term contracts with Delegat's, could have been relevant to Oyster Bay shareholders. These shareholders were considering an offer from the counter-party to those contracts as well as an offer from an outsider. Mr Graham acknowledged that he had been aware of Mr Rankin's interest in the unencumbered market value of Oyster Bay's vineyards, but was not aware of the figure of $90 million before Mr Rankin gave his evidence at the meeting.
 Mr Falconer acknowledged in evidence that the independent directors, conscious of Mr Rankin's ongoing complaints about the reported value of Oyster Bay's vineyards, had carefully considered whether to disclose the unencumbered market value of the vineyards. They had decided that it would be misleading and dangerous to disclose the information in the TCS even with the qualifications that would need to accompany the information. That remained the directors' view.
 Mr Delegat's statement to the Panel emphasised that Oyster Bay's vine plantations had been progressively developed and continued to be exposed to climatic risk, and that the value of Oyster Bay's vineyard assets and the effectiveness of Delegat's management had to be considered against this background.
 Mr Hancox outlined a series of discussions he had had with Mr Delegat and Mr Falconer prior to giving the takeover notice. He acknowledged that Mr Yealands was aware of the market value of premium quality vineyards in Marlborough when making PYIL's offer. Mr Hancox said he was also conscious that an unencumbered market value was not included in the target company statement issued by Oyster Bay in response to PYIL's offer. He said he was comfortable with this non-disclosure because disclosure would have reduced the prospects of PYIL's offer being successful. He said they had fielded enquiries from commentators who were puzzled that PYIL was offering $4.00 per share when this was well above the Ferrier Hodgson range of $2.39 to $3.15 per share.
Panel analysis of the issue
 The target company statement is a fundamentally important document for all takeover transactions that trigger the Code. It is issued by the directors of a target company in response to an offer received and contains important factual information about the target company to assist the decision of shareholders to accept or reject an offer and includes an independent adviser's report as well as a recommendation by the directors in relation to the offer and the basis for that recommendation.
 Clauses 18(5) and 24 require disclosure in the TCS of all information about the assets and financial affairs of the target company, or any other information, that "could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer". As to the appropriate interpretative approach to clauses 18(5) and 24, the Panel considered that the directors of target companies should take into account the following points:
(a) The question whether particular information could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer is essentially a question to be resolved having regard to the particular circumstances.
(b) The issue of reasonableness requires an objective test based upon an hypothetical reasonable director in the position of having responsibility for preparing the TCS, and without reference to the actual subjective views of the target company directors in that position. Directors have to be careful to avoid prejudging the capacity of their company's shareholders to assimilate complex information. The responsibility rests with directors to provide information in a form which allows shareholders the opportunity to understand and interpret it for themselves.
(c) The issue of materiality also requires an assessment as to whether the offerees would give some relative weight to the particular item of information, and include it as one of a number of factors to be considered, when determining whether to accept or reject the offer. The particular item of information on its own does not have to be so significant as to be likely to determine an accept/reject decision one way or the other, but nor should it be so insignificant as to have no bearing on such a decision.
(d) Particular care is required where the information is forward-looking and relates to or assumes a state of affairs which may or may not eventuate. Directors must assess the potential impact of the information on the decision of shareholders to accept or reject an offer and consider whether disclosure is appropriate.
 It was common ground between the parties that Oyster Bay's vineyard assets had an unencumbered market value (assuming a scenario without the long term contracts in place) of the order of $90 million, resulting in an NTA valuation of Oyster Bay's shares at above $8.00 per share in June 2005. This was Mr Rankin's assessment. The Panel did not understand Oyster Bay, Delegat's, Logan Stone or Ferrier Hodgson to dispute Mr Rankin's view. Logan Stone expressly agreed with it. Logan Stone had provided formal market valuations of Oyster Bay's vineyards at July 2004 of $65 million on an unencumbered basis, and $50 million on an encumbered basis.
 The factors which the Panel considered to be material to its deliberations on these matters included:
(a) The unencumbered market value of Oyster Bay's vineyard assets of $90 million implies an NTA amount of Oyster Bay of $8.00 per share, significantly above Delegat's offer price of $4.00 per share;
(b) Delegat's has stated that long-term security of grape supply is important and that it does not intend to withdraw from its contractual arrangements with Oyster Bay;
(c) There is evidence that major international breweries and wine-making companies are interested in securing grape supply by acquiring New Zealand vineyards and appear to be influencing the rising price of vineyard properties in Marlborough and elsewhere;
(d) One of the "Key Features" of the investment, as promoted in Oyster Bay's original 1999 prospectus, was: "Benefit from the value of the underlying properties. The net asset value per share (as per Logan Stone valuations) will be $1.04 per $1 invested upon subscription. PrimeWairauValley viticultural land has appreciated strongly in value since 1995." Oyster Bay's reported vineyard asset values have declined between the 2001 and 2004 Annual Reports against a background of increasing land values in Marlborough during the same period;
(e) The nature of the contractual arrangements with Delegat's suggests that it would be extremely unlikely that Oyster Bay could sell its vineyard assets on an unencumbered basis;
(f) If Delegat's obtains majority voting control of Oyster Bay it could potentially control the composition of the board, making it even less likely that Oyster Bay would initiate moves to sell the vineyard assets or unwind the long term contracts; and
(g) If Delegat's obtains majority control, and in the absence of information about unencumbered market value, there is greater potential for value transfer if Delegat's were to acquire further shares by way of the "creep" provisions of the Code in future years at share prices that are reflective more of income based valuations than of vineyard market valuations.
 On the basis of the above analysis the Panel considered, having regard to all of the evidence available to it, that information about the market value, encumbered or unencumbered, of Oyster Bay's freehold and leasehold vineyards could reasonably be expected to be material to the making of a decision by Oyster Bay shareholders to accept or reject the Delegat's offer.
 The Panel has determined under section 32(3)(b) of the Act that it is not satisfied that Oyster Bay acted in compliance with the Code in that the TCS omitted information relating to the market value, encumbered and unencumbered, of Oyster Bay's freehold and leasehold vineyards that could reasonably have been expected to be material to the making of a decision by Oyster Bay's shareholders to accept or reject the Delegat's offer.
 PYIL submitted that its costs in relation to the Panel's meeting should be the subject of a costs order in its favour and against the signatories of the clause 26 certificate in the TCS. The Panel has no powers to award such costs.
 The Panel will deal with costs separately in terms of the Takeovers (Fees) Regulations 2001.
DATED at Wellington this 27th day of September 2005
SIGNED for and on behalf of the Panel by the Acting Chairman
1. This reasoning appears to be incorrect. Logan Stone's income based valuation was a DCF valuation.
2. Mr Rankin was not aware at the time he made his complaint that Logan Stone had prepared market valuations of Oyster Bay's vineyards on both an encumbered and an unencumbered basis.
3. The Logan Stone valuation for the Oyster Bay vineyard at 31 August 2001 was reported in the 2001 Annual Report as $30.4 million. The Logan Stone valuation of the same property at 1 July 2004 was shown as $28.3 million in the 2004 Annual Report.