Takeovers Panel seeks leave to be heard in an amalgamation proposal

In the first case since the Takeovers Panel signalled its change in attitude to schemes of arrangements and amalgamations involving code companies, the Court of Appeal expresses its preliminary views on the Panel's right to be heard.

Background

In May this year the Takeovers Panel indicated that pending review of the Companies Act to "incorporate the principles of the Takeovers Code", it would seek to be heard by the High Court in cases of proposed schemes of arrangement involving code companies.

This case1 involved a proposed scheme of amalgamation of three property investment companies (all members of the same group) under Part 15 of the Companies Act 1993 (the Act). Under the proposal, Property Fund Thirty-One Ltd and Dominion Newmarket Properties Ltd are to become amalgamated in Dominion Income Property Fund Ltd (Dominion). Dominion will own all the properties presently owned by the other amalgamating companies and the investors in those companies will become owners of shares and debentures in Dominion.

Initial orders were granted by the High Court on the application of the amalgamating companies setting out the approval steps required for the amalgamation to proceed. These included an order requiring a special resolution (by a postal vote) of the shareholders in each company. A further order stated that there would be no need for a quorum of shareholders for the voting on the special resolutions (Order 6).

On being notified of the proposed amalgamation, the Panel filed an application with the High Court for a variation of the approval mechanisms proposed by the court. In particular the Panel requested that the initial orders be amended to require the special resolutions to be approved by those shareholders entitled to vote representing a majority of the total voting rights of each of the amalgamating companies. The Panel said it was concerned that under the agreed mechanisms the amalgamations could potentially be approved by a very small number of shareholders in each company. It also asked to be notified of the results of the voting so that it could apply for leave to be heard on the application for the final approval.

The High Court granted both orders requested by the Panel but the amalgamating companies challenged these orders on appeal to the Court of Appeal on the basis that:

• the amalgamation is not a takeover for the purposes of the Takeovers Code;
  
  
• practice in relation to the amalgamation proposals under the Act has generally been along the lines originally proposed by the High Court including the no quorum requirement;
  
  
• the Panel did not have a legitimate interest in the proposed amalgamation to participate in the hearing under section 236(2) of the Act and further that it could not intervene at the initial order phase. In addition it was submitted that the Panel's participation in the hearing was beyond its powers under the Takeovers Act.

Court of Appeal decision

The Court of Appeal allowed the appeal and reinstated the initial High Court orders (subject to some necessary amendments to the original dates). However, it retained the additional order granted by the High Court requiring the Panel to be notified of the outcome of the shareholder votes so that it can be heard on the application for final approval (subject to the new requirement that the Panel now only has two working days to give notice that it wishes to be heard).

Was the amalgamation a takeover?

The Court of Appeal acknowledged that the amalgamation proposal did not come under the Takeovers Code since it did not involve the acquisition by any person or group of associated persons of more than 20% of the voting rights of the code companies involved.

The argument put forward by the Panel that the amalgamation "would produce an effect which is economically the same (or practically the same)" as a takeover under the Code was not regarded by the court as a "controlling consideration". The court noted that "the law generally does not yet equate form and substance". It also noted that in practical terms Dominion would be controlled by the same group of shareholders that currently control the other amalgamating companies.

However no definitive ruling was given on whether the amalgamation was a "takeover" for the purposes of the Takeovers Act due to the time pressure under which the decision was given and the fact that they did not see it as critical in the context of the case as a whole. The court did note that it was inclined to agree that the amalgamation was not a takeover.

Was the initial approval mechanism appropriate?

The court considered that the arguments for and against the initial approval mechanism were closely balanced but decided in favour of reinstating the initial orders for the following reasons:

• not requiring a quorum is consistent with powers given to the court under section 236(2)(b) of the Act. This section does not refer to approval by an absolute percentage of shareholders, instead it vests a discretion in those who are present and vote at a meeting (personally and by proxy) or, as in this case, by analogy to those shareholders exercising their right to vote by post;
  
  
• the Panel's threshold requirements for each of the amalgamating companies were likely to be difficult to achieve in practice based on evidence provided of shareholder voting figures on similar proposals in the past (including earlier schemes promoted by the Dominion Group). This could mean that the amalgamation could be approved by an overwhelming majority of those who vote but not be passed because of a failure to meet the majority voting threshold requirement. The Panel's suggestion that in such circumstances the amalgamation could still be approved by the court would be contrary to the scheme of section 236;
  
  
• there was no basis on the evidence presented for departing from the usual practice, including the usual practice previously adopted for similar amalgamations within the Dominion Group. The court observed that the proposed amalgamation appeared to be a very orthodox amalgamation and not a device to avoid the Takeovers Code.

Did the Panel have standing?

The Court of Appeal made no definitive ruling on the question of whether the Panel had the right to be heard on the amalgamation proposal given that the appeal was allowed on its merits. However the Court did express the view that it was "at least well arguable that the Panel did have standing". It noted that "given that Part 13 and Part 15 amalgamations may engage the Takeovers Code and are sometimes used as devices to avoid the Code, we are inclined to think that the proposed amalgamation was legitimately a matter of interest to the Panel under section 8 of the Takeovers Act."

On the basis of this legitimate interest the court noted that it was also inclined to think that it was open to the High Court to treat the Panel as "interested" for the purposes of section 236(2) of the Act.

Was the Panel acting beyond its powers?

Again, the court declined to express a definitive view on this point but it did note that it "tentatively" thought the Panel's participation in the hearing was within its powers.

Did the Panel have the right to intervene at the initial order phase?

On this point, the Court of Appeal considered that there was no procedural objection to the High Court reviewing and supplementing the initial orders. It considers that section 236(2) of the Act contemplates further orders and implies a power to revise orders since it permits an initial order to be made at the instance of "interested parties." There was no need to use the High Court Rules (as in this case) to authorise new or amended orders.

 

[1] Dominion Income Property Fund Limited and Ors v Takeovers Panel (Unreported, 26 October 2006, Court of Appeal CA229/06)

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.