Ordinary resolution for sale of Fletcher Challenge Forests' forest estate

In December last year, the High Court ruled1 that Fletcher Challenge Forests Limited (FCF) only had to put an ordinary resolution to shareholders with a 50 per cent vote, rather than a special resolution with a 75 per cent vote, when forest assets owned by its subsidiaries are sold.

FCF has no interest in the forest assets owned by its subsidiaries, and is not a party to the sale agreements. However, the value of the forest assets is more than half of the value of FCF's assets (those assets largely being made up of shares in, and advances to, its subsidiaries).

There is no question that the sales will be "major transactions" in terms of section 129 of the Companies Act 1993 (the Act) for each of the selling subsidiaries.

The question for the court was whether the sales by the subsidiaries would also constitute a major transaction for FCF itself.

Section 129 governs transactions involving more than 50 per cent of a company's assets. However, the section refers only to "a company" and not to a company and its subsidiaries.

In a press release, FCF's board acknowledged the reasonableness of the view that a transaction of this nature could be regarded as a major transaction, which is why it sought declarations of the High Court.

In its application, FCF's lawyers noted that FCF's subsidiaries, and not FCF itself, are selling the forests. FCF is not itself disposing of any assets or incurring any obligations. As such, the transaction is not a major transaction for FCF, but only for the subsidiary companies actually selling the forests. The court agreed with this argument and confirmed that the test is applied on a company by company basis and does not "look through" to apply on a consolidated group basis.

In confirming that an ordinary resolution is all that is required, the judge noted that "if a special resolution is to be required in circumstances such as those that exist in this case, then that should be specifically addressed by an amendment to the provisions of the section".

1 Fletcher Challenge Forests Limited (High Court, Auckland CIV 2003 404 5989, 5 December 2003, Salmon J)

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