Arbitrator's decision upheld in minority buy-out dispute on share price

In 2001, the Law Commission recommended changes to the minority buy-out provisions in the 1993 Companies Act in response to criticism from the bench that the provisions lacked detail and were "substantially flawed". In this article Bell Gully solicitor Connie Tregidga examines a recent High Court case which confirms that there is still a need for these recommendations to be addressed.

The Law Commission report – Minority Buy-Outs

The Companies Act 1993 provides an exit option for minority shareholders who have unsuccessfully opposed a company from undertaking a fundamental change in its structure or operations by providing a mechanism for their shares to be purchased by the company at a fair and reasonable price.

In its current form the mechanism has been the subject of some criticism.  In 2001 the Law Commission reviewed the provisions and issued its recommendations for changes to be made in a report entitled Minority Buy-Outs.  These recommendations mainly address concerns raised around the basis for calculating a fair and reasonable price for the shares.  The Law Commission has recommended that more guidance be given around this issue in the Act. 

In particular, the Law Commission recommends that the price of the shares should be an “honest estimate” of the value of the shares as at the date the company gives the notice to the shareholders setting out the price the company is offering to pay for the shares by:

• adjusting the value of the shares to exclude any element of value arising from the accomplishment or expectation of the event authorised by the resolution that entitled the shareholder to require the company to purchase the shares¹; and

• assessing the value of the relevant class of shares and then allocating that value pro rata among all shareholders.

While it has yet to be decided whether the Law Commission’s recommendations will be adopted, the Ministry of Economic Development (MED) is currently considering reform of the minority buy-out provisions based upon the recommendations in the Commission’s report.

Trans Tasman v Gibson

A recent High Court case², where a company sought leave to appeal against the award of an arbitrator on the price to be paid for minority shareholder’s shares under section 112 of the Companies Act 1993 (the Act), provides a further illustration of the problems that can arise from the lack of clarity in the current minority buy-out provisions.

The background facts

On 28 September 2005, Trans Tasman Properties Ltd announced a reconstruction proposal.  This proposal involved Trans Tasman retaining its Australasian assets, while a subsidiary company that held the Asian assets, Asian Growth Properties Ltd, was to be sold with a view to obtaining a separate listing on the Alternative Investment Market of the London Stock Exchange.

A special resolution approving the sale of Asian Growth was passed at a shareholders’ meeting on 15 December 2005.  The sale constituted a major transaction of Trans Tasman under section 129 of the Act.  Several shareholders who voted against the resolution subsequently gave notice to Trans Tasman pursuant to section 111 of the Act requiring Trans Tasman to purchase their shares.

On 24 January 2006 Trans Tasman advised the dissenting shareholders that they would purchase the shares for a nominated price of $0.4506 per share.  This price was advised to be the weighted average trading price of the shares in Trans Tasman for the one month prior to the 28 September 2005 announcement.

Eleven shareholders objected to this price and required a fair and reasonable price to be determined under section 112 of the Act.  Where an objection to the price nominated by the Company is received within a set time, the Company must refer the question of what is fair and reasonable to arbitration.

The decision at arbitration

In determining a fair and reasonable price under section 112,  the arbitrator assessed the value to be $0.56 per share.  He calculated this value by taking the net asset value of Trans Tasman (which was the value submitted as the fair and reasonable value by the dissenting shareholders), discounting this by 20% and allocating that value pro rata among Trans Tasman shares.

The arbitrator attributed about 5% of the discount to the discount to net asset value that shares of listed property entities were generally observed to trade at, and 15% of the discount to net asset value to factors unique to Trans Tasman, such as the intended transition from property ownership to property development and the limited liquidity of the shares.

Importantly, the arbitrator determined that the price of the shares was to be determined at 24 January 2006, the date Trans Tasman advised the dissenting shareholders that they would purchase their shares³.  After discounting the net asset value of the shares at this date, the resulting price was 24% above the value nominated by Trans Tasman⁴. 

Trans Tasman sought leave from the High Court to appeal against this award.  They submitted that the arbitrator erred in law in determining the fair and reasonable value by referring to the minority shareholders’ contended reasons for voting against the transaction, and to information attributable to the transaction from which the minority shareholders dissented. 

The High Court’s decision

In dismissing the application for leave to appeal, the High Court found that the arbitrator exercised his expert knowledge in determining the fair and reasonable price, and that there was no error of law.  The court found that the arbitrator determined his value by applying his experience and judgement.

Further, the High Court relied on Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd⁵ in finding that Trans Tasman would need to demonstrate that there were “very strong indications of error” in the arbitrator’s decision before they would be granted leave to appeal.

The current proposal

Given that the MED is now considering the Law Commission’s recommendations, it is interesting to consider whether the arbitrator’s decision in this case would have been the same had the Commission’s recommendations been applied as the basis for calculating a “fair and reasonable” price.

The arbitrator used the date Trans Tasman agreed to purchase the shares as the date at which the value of the shares was assessed.  This accords with the Law Commission’s proposal. However, in assessing the discount to be applied from the value as at the date Trans Tasman agreed to purchase the shares, the arbitrator made no reference to excluding any element of value arising from the contemplated transaction.  In fact, the arbitrator only adjusted the net asset value of the shares for factors specific to Trans Tasman generally and the industry they operate in.  

The decision of the arbitrator, therefore, does not appear to be based on all of the Law Commission’s proposed changes to section 112 of the Act.  If the Law Commission’s proposals were implemented in their current form, the arbitrator would have been obliged to assess the value of the shares by removing any value attributable to the transaction.

We look forward with interest to the MED’s proposal with respect to the minority buy-out regime.  However, we note that as the Law Commission’s proposals are currently drafted, there is still room for discretion, both at a company and an arbitrator level, as to how the element of value attributable to the relevant transaction is calculated. 

Furthermore, while the proposals (as currently drafted) may result in more accuracy on a case-by-case basis, they are unlikely to bring any additional comfort to companies planning transactions that may trigger the minority buy-out provisions, as they provide little certainty as to the costs to a company of a minority buy-out pursuant to section 111 of the Act.

To access a copy of the Law Commission’s report on Minority Buy-Outs visit the Commission’s website at www.lawcom.govt.nz.

¹ Unless the resolution is one approving an amalgamation under section 221 of the Companies Act under which all the shareholder’s shares are not to be converted into shares in the amalgamated company, in which case the valuation must take into account any benefit of the amalgamation to the company, its shareholders and directors.

² Trans Tasman Properties Ltd v Gibson (Unreported Judgement, CIV 2006 404 6919, Williams J, HC Auckland, 9 March, 13 April 2007).

³ We note that this aspect of the award was not appealed. 

⁴ That value being the weighed average trading price of the shares in Trans Tasman Properties Ltd for the one month prior to the 28 September 2005 announcement.

⁵ [2000] 3 NZLR 318

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