Bell Gully responds to the latest Takeovers Panel's reform proposals for Schemes of Arrangement and Amalgamations involving Code Companies

In this article we outline the proposals put forward by the Takeovers Panel in its latest consultation paper on "Schemes of Arrangement and Amalgamations involving Code Companies" and explain why Bell Gully has advised against the addition of further protections.

Background

In December 2007 the Takeovers Panel released a consultation paper to address its concerns (and those of some market participants) over the perceived trend for Code companies to use schemes of arrangement and amalgamations in order to circumvent the requirements of the Takeovers Code. The consultation paper follows the panel's June 2006 discussion paper on the same matter, and the panel's subsequent recommendations to the Minister of Commerce and to the Commerce Select Committee in which the panel called for legislative amendments to be included as part of the 2006 Business Law Reform Bill in order to address the problem. This request failed and in March 2007 the panel was asked by the Minister of Commerce to lead a further review and consultation process on this matter with market participants.

The 2007 Consultation Paper

The latest Takeovers Panel consultation paper has been prepared with the assistance of the New Zealand Institute of Economic Research (NZIER). The paper includes an overview of the current position relating to the regulation of changes of control applicable to Code companies and provides a comprehensive discussion on the panel's views of the problems arising from the use of the Companies Act reconstruction provisions (namely Part XIII, which deals with amalgamations, and Part XV, which deals with schemes of arrangements) to effect changes of control of Code companies.

The Takeovers Panel's chief concern centres on the process used by Code companies to achieve a change of control as it regards the Takeovers Code's procedures as prescribing a minimum standard for Code companies. In particular it notes that the requirements of the Takeovers Code are designed to be fairer, to provide equality of treatment and to give shareholders greater protection from the potential adverse consequences of a change in control. In contrast, the panel considers that the use of the reconstruction provisions in the Companies Act by Code companies to effect a change of control can give rise to an inferior process with negative effects on shareholders' rights.

According to the panel there are five principal alternatives to the option of maintaining the status quo. In brief:

• Option one involves the insertion of anti-avoidance provisions into the reconstruction provisions of the Companies Act along the lines of the position in Australia. This would include amendments being made to Part XV of the Companies Act to require the court to withhold approval for any scheme until it is satisfied that the scheme has not been proposed to avoid the Code, or unless the panel has provided a "no-objection" statement. A similar "no-objection" statement could also be a prerequisite for an amalgamation under Part XIII.

• Option two involves an amendment of the Takeovers Act and the Code to exempt schemes and amalgamations involving Code companies from the Code, while amending the Companies Act to ensure the panel has a greater involvement in the reconstruction process as set out in option one.

• Option three involves an amendment of the reconstruction provisions of the Companies Act so that shareholder approval thresholds and shareholder information requirements are consistent with those in the Code. Although it is recognised that in making this alignment there are issues over the degree of shareholder approval necessary and over the coverage of which shareholders should be entitled to vote.

• Option four involves an amendment of the reconstruction provisions of the Companies Act so that amalgamations under Part XIII of the Companies Act cannot be undertaken if a Code company is involved. As schemes would still be available where Code companies are involved, this option could be implemented in conjunction with either Option one or Option three in respect of schemes.

• Option five which would involve an amendment of the reconstruction provisions of the Companies Act so that neither amalgamations or schemes of arrangements could be used where Code companies were involved, except with the permission of the panel in circumstances where the use of the reconstruction provisions is clearly warranted.

The panel notes in the paper that it is approaching the issue of reform in this area with an open mind and that the options outlined in the paper are to generate discussion and to assist in reaching conclusions on the way forward. This is in marked contrast to the panel's earlier attempts to address this issue in 2006 when the panel was clearly in favour of a similar approach to that outlined in option two, whereby the provisions in the Takeovers Code for schemes and amalgamations would be removed from the Code and instead be incorporated as part of the Companies Act provisions in Parts XIII and XV of the Act. In particular the panel recommended in its 2006 submissions to the Minister of Commerce that:

• Part XIII of the Companies Act be amended to require that:

• parties to a proposed amalgamation must obtain the approval of the panel to the amalgamation process; and

• the panel, in giving approval for an amalgamation process, shall take into account the principles of the Takeovers Code; and

• Part XV of the Companies Act be amended to require that:

• the courts take into account the principles of the Takeovers Code when deciding the requirements for approval of a scheme of arrangement, including the level of shareholder approval required and the information to be provided to shareholders; and

• before approving a scheme of arrangement the court receives and takes into account recommendations from the panel as to the requirements to be met for the scheme of arrangement to be approved.

Feedback required

Market participants were asked to provide feedback on the matters raised in the consultation paper in the form of a questionnaire which accompanied the paper. This required market participants to provide their views on:

• whether they agreed that a problem exists with the current regulatory provisions;
• whether the policy objectives outlined by the panel were appropriate for assessing how alternative solutions for effecting changes of control of Code companies should be measured;
• the five options noted above; and on
• the appropriateness of the Code's current 90% compulsory acquisition threshold. On this issue the panel is interested in determining whether such a high threshold has created an incentive for companies to utilise the reconstruction provisions instead of the Code, because 90% might be unreasonably hard to achieve.

Bell Gully's submission

The tenor of Bell Gully's submission on the Takeover Panel's consultation paper (which we provide a link to below) is our strong preference for the continued availability of the reconstruction options in their current form.

In Bell Gully's view the reconstruction provisions of Parts XIII and XV the Companies Act are important and appropriate mechanisms to achieve the objectives contemplated by the legislature when passing that Act. The existence of schemes and amalgamations means that market participants are exposed to an array of options and are able to match their individual situations with the most appropriate mechanism.

We consider that it is important for the panel to recognise that schemes have been very beneficial to companies and shareholders in New Zealand. Over the past eight years Bell Gully has been associated with a number of such beneficial schemes such as those involving Fletcher Challenge, Fisher & Paykel, Dominion Property Group, St Lukes and the INL and Sky TV merger. For its part, Bell Gully is not aware of schemes that have been approved under Part XV, yet have been prejudicial to shareholders. We were particularly concerned with the panel's reference in the consultation paper to the Waste Management transaction which used the amalgamation process under Part XIII as an example of possible prejudice. Whereas, in fact, shareholders were well compensated for their shares in that company (and very few shareholders voted against that amalgamation).

In Bell Gully's view, the risk of adding further protections is that Parts XIII and XV lose their flexibility, making it practically impossible for certain reconstructions to be effected, or putting them at risk of being hijacked by small minorities with disproportionately large powers of veto. This issue arose during the Dominion Property Group litigation with the Takeovers Panel that went to the Court of Appeal in 2006. The panel's suggested voting regime was too stringent and may have jeopardised an arrangement that was beneficial to all investors.

In our view, the Part XV jurisdiction must be preserved and safeguarded, not rendered useless by additional safeguards that in fact are detrimental to the body of shareholders the panel is wishing to protect. By maintaining the flexibility of the current regime the competitiveness of New Zealand's capital markets internationally will be protected.

Next steps

Submissions for the paper closed on 15 February. Submissions received will be used to assist the panel to advise the Minister of Commerce on options to deal with the cross-over between the reconstruction provisions in the Companies Act and the provisions of the Takeovers Code. NZIER will also be involved in the analysis of the submissions and the preparation of a Regulatory Impact Analysis (RIA) if the panel conclude that it should recommend to the Minister that changes be made to the existing laws. The RIA will require the panel to:

• demonstrate that the status-quo is unsatisfactory;
• consider all feasible options;
• identify all environmental, economic, social (including health) and cultural costs, risks and benefits of each feasible option;
• quantify or otherwise assess each impact;
• indicate any assumptions or judgments made by policy makers; and
• indicate why the preferred option has been chosen over others.

We will keep you updated on any further developments on this matter.

To view Bell Gully's submissions on the consultation paper see www.bellgully.com or click here. For further details, visit the Takeovers Panel's website at www.takeovers.govt.nz To view the consultation paper, visit the Takeovers Panel's website or click here to download the paper.

For further information please contact your usual Bell Gully adviser or:

Andrew Brown
Partner

David Cooper
Partner

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.