Amalgamations and their effect on existing contractual arrangements

In this case note Bell Gully partner Jayne Kirton and solicitor Neetha Alex review a recent Court of Appeal decision dealing with the legal consequences on third party contracts of court ordered amalgamations under Part 15 of the Companies Act. The case also illustrates how important it is for contracting parties to consider their requirements in the event there is a change of control through an amalgamation and to ensure that those requirements are included in the contract.

Since the decision in Carter Holt Harvey Ltd v McKernan,¹ it has been established in New Zealand that the effect of an amalgamation implemented under Part 13 of the Companies Act 1993 (the Act) is that the amalgamated company stands "in the shoes of the amalgamating companies" and therefore receives the benefits of, and incurs the obligations pertaining to, all assets and liabilities of the amalgamating companies.

The amalgamation does not result in each amalgamating company transferring its rights in assets and liabilities to the amalgamated company while the former entities continue to exist as part of the latter, post-amalgamation.

The amalgamated company is not treated as a different party for the purposes of third party contractual arrangements. In a recent decision, Elders New Zealand Ltd v PGG Wrightson Ltd,² the Court of Appeal upheld the High Court's earlier decision that court ordered amalgamations under Part 15 of the Act could result in the same legal consequences as amalgamations under Part 13 of the Act, outlined above.

The background facts

Wrightson and Elders (and in some cases, their associated companies) were co-owners of a number of stock saleyards. The parties' rights in respect of such saleyards were regulated by either agreements or the constitutions of the co-owned companies, all of which provided for rights of pre-emption in the event that any one of the co-owners sought to "...transfer...or otherwise dispose of the whole or part of its interest in..." the relevant stockyard.

Wrightson entered into a scheme of arrangement with Pyne Gould Guiness under Part 15 of the Act whereby Wrightson would amalgamate into Pyne Gould Guiness (to be renamed PGG Wrightson Limited post-amalgamation). The High Court granted final orders, approving the arrangement. Elders then issued proceedings seeking a declaration that the arrangement triggered Elders' pre-emptive rights in the co-owned companies.

The High Court found in favour of PGG Wrightson on the basis that the court approved amalgamation procedure under Part 15 of the Act had the same effect as an amalgamation effected under Part 13 - that is the amalgamated company stands "in the shoes of the amalgamating companies".

Following Carter Holt Harvey Ltd v McKernan³ therefore, there was no transfer of Wrightson's interest in the co-owned saleyards to PGG Wrightson, as was required to trigger any right of pre-emption held by Elders. Elders appealed to the Court of Appeal.

The decision

The Court of Appeal found that Part 15 of the Act offers entities an alternate scheme to implement amalgamations and that once such approval is obtained, amalgamations under Part 15 of the Act have the same legal consequences as those effected under Part 13 of the Act.

The court noted section 236(1) (being the primary operative section in Part 15 of the Act) does not define the role of the court with any clarity. Therefore some ambiguity is created. However it concluded that it would be untenable to interpret the court's jurisdiction under Part 15 of the Act as being confined to such amalgamations which have already been effected under Part 13 of the Act.

Factors the court considered in reaching its decision were:

• Although section 236(1) does not cast the court's role as one of approval, such language is expressly used in the heading for Part 15 of the Act and in various sections under that Part.

• Section 238 of the Act affirms an interpretation of Part 15 of the Act as offering an additional mechanism for implementing amalgamations which could otherwise have been effected under Part 13 of the Act.

• The court can therefore sanction an amalgamation even if all the requirements (particularly those relating to public advertising and minority buy-out rights) for amalgamations under Part 13 of the Act have not been met.

Although the court accepted that the final orders granted by the High Court approving the amalgamation were only expressed to be binding on Wrightson, Pyne Gould Guiness and their shareholders, the court considered it inappropriate to argue that such orders were not also binding on Elders.

Because the merger plan specified the effects of the amalgamation in a way which correlated to the effects of an amalgamation under Part 13 - stating that PGG Wrightson would "...succeed to all the property, right, powers and privileges...[and] all liabilities and obligations of Wrightson..." - the court concluded that an amalgamation in the Part 13 sense had been effected.

In that context, the court found that PGG Wrightson was to be treated as the same party as Wrightson for the purposes of the latter's business dealings with Elders. There had therefore been no transfer to PGG Wrightson of Wrightson's interests in the relevant stockyards. In the absence of such transfer, and given that the terms of the rights of pre-emption contained in the relevant agreements and constitutions were triggered only by a transfer or disposal of the relevant interests, the court dismissed Elders' appeal.

Practical implications

Parties to a commercial relationship should take care when drafting the terms of pre-emptive rights and change of control provisions. As noted by the court in this case, the particular facts gave rise to a change of control. The amalgamation would therefore have invoked Elders' rights of pre-emption had those rights been expressed to be triggered by such change of control.

Change of control issues (particularly in relation to joint ventures and non-competition clauses) should be carefully considered and any trigger clause appropriately worded to ensure that it applies in a manner that suits the parties' requirements in the event that counterparties are involved in an amalgamation. Providing for these considerations will maximise the benefit a party derives from such provisions.

¹[1998] 3 NZLR 403

²[2007] NZCA 596

³[1998] 3 NZLR 403

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