Takeovers Panel continues to advocate for regulatory changes for schemes of arrangements and amalgamations

Last week the Takeovers Panel released details of its latest recommendations for regulatory change for schemes of arrangements and amalgamations.

Background

Over the last two years, the Takeovers Panel has expressed its concern about the perceived increase in the use of amalgamations and schemes of arrangements under the Companies Act as an alternative to a takeover offer made under the Takeovers Code, and it has been pressing for legislative reform to address these concerns.

The Panel has been particularly concerned about what it considers to be a lower level of shareholder approval required to give effect to an amalgamation or scheme of arrangement under the Companies Act than would be required if the transaction were undertaken as an offer under the Takeovers Code. In addition, the Panel considers that the same shareholder protections contained in the Takeovers Code, such as those relating to the provision of information and independent advice, are not available to shareholders when the transaction is carried out as an amalgamation or scheme of arrangement.

The Takeovers Panel initially sought reforms to address these issues as part of a Business Law Reform Bill at the end of 2006. However, the Government was not willing to include what was a substantive law reform proposal in a bill without the benefit of a fuller process and analysis and the Panel was asked by the Government to lead a second round of public consultation in 2007.

The Panel's latest recommendations to the Minister of Commerce continue to seek amendment of the reconstruction options in the Companies Act in a slightly modified form from its 2006 proposals.

The Takeovers Panel's recommendations

In its latest recommendations to the Government, the Panel has called for substantive amendments to both Parts 13 and 15 of the Companies Act where code companies are involved.

No amalgamations for code companies

The Panel is recommending prohibiting the use of long form amalgamations under Part 13 of the Companies Act where an amalgamating company is a code company. Bell Gully does not share the Panel's view that this change is necessary and we consider that the amalgamation structure should continue to be available in appropriate cases (see our submissions on the Panel's 2007 consultation paper).

The removal of this amalgamation mechanism would mean that the choice of transaction structure for changes of control of code companies would be limited to the mechanisms under the Takeovers Code or the scheme of arrangement mechanism under Part 15 of the Companies Act.

Part 15 schemes of arrangements or amalgamations

The Panel continues to advocate for some Takeovers Code equivalent principles to be considered where code companies look to effect a scheme of arrangement or amalgamation under Part 15 of the Companies Act.

The Panel proposes that Part 15 be amended to provide that the court would be prevented from approving a scheme that would have any effect on the voting rights of a code company unless:

• the court is satisfied that the shareholders of any such code company would not be adversely affected by the transaction not being undertaken under the Takeovers Code; or

• the Panel has issued a "no objection statement" to the amalgamation or arrangement.

This is said to bring New Zealand legislation more closely in line with that in Australia in that it is similar to section 411(17) of the Australian Corporations Act.

It is not clear what a "no objection statement" would involve. In its press release, the Panel indicates that should its proposed amendments to the Companies Act be enacted, t he Panel would develop and publish information about:

• the criteria the Panel would apply for the giving of a "no-objection statement" (which, it notes, is likely to be similar to those that apply in Australia);

• the timing of the giving of "no-objection statements" for the Court processes for schemes;

• how to obtain a "no-objection statement"; and

• any fees for making an application for a "no-objection statement".

This will be essential for the new process if the Panel's recommendations are followed and we think that the criteria under which "no-objection statements" will be considered should be published now by the Panel given that, in practice, that criteria will play a material part in the operation of the regime.

Voting thresholds

Another key area where the Panel has been keen to change the rules for schemes of arrangement is in relation to the voting thresholds applied by the court for the approval of a scheme. Currently the courts require approval by 75 percent of the shareholder votes cast. This, the Panel argues, can potentially result in schemes being approved by a very small number of shareholders. The Panel is of the view that this can be overcome by providing an additional requirement that those voting in favour must represent a majority of the shares eligible to be voted (that is, more than 50 percent of the total voting rights of the company).

However, as pointed out by Bell Gully and other respondents to the Panel's December 2007 consultation paper, a concern with this proposal is that a large proportion of shareholders often fail to participate in the voting process and in the case of some funds, the managers are unable to vote. Practice suggests that the Panel's additional threshold requirements are likely to be difficult to achieve (particularly for companies with widely held share registers) and could mean that a scheme could be approved by an overwhelming majority of those who vote but not be passed because of a failure to meet the majority of voting rights threshold requirement. In such cases, this would mean that transactions that were opposed by only a small number of shareholders may not be able to proceed even though they were supported by the vast majority of shareholders who exercised their rights to vote. More fundamentally, the proposed change is not consistent with the voting approval mechanisms in the Takeovers Code itself which enable change of control transactions to proceed with approval by only 50 percent of votes cast.

It is also unclear why the voting threshold applying to amalgamations or arrangements should be different from that which applies to other major events requiring approval from a company's shareholders. A company (including a code company) can sell its entire business undertaking, or be placed into liquidation, by a 75 percent majority of votes cast with board support. There is no apparent justification for requiring a different (and higher) voting threshold merely because the transaction in question is one which could also have been conducted under the Takeovers Code.

The proposed changes may also not achieve the alignment with Australia referred to by the Panel. Australia does currently have a 50 percent test - but it is only a requirement that more than 50 percent by number who actually vote at the meeting support the resolution. The Australian requirement is not more than 50 percent of all voting rights - as is proposed by the Panel. In addition, Bell Gully understands that consideration is being given to dropping this requirement in Australia, which is what the New Zealand Companies Act did in relation to schemes of arrangement in 1993 when the new Act was introduced.

Interest classes

Under the Panel's latest proposal, the 75 percent voting threshold must be obtained at meetings of each "interest class" of shareholders. To ensure that there is more clarity and certainty on this part of the voting process, the Panel is recommending that further statutory guidance be given to the court in Part 15 of the Companies Act on how to determine "interest classes". The Panel believes that New Zealand should codify (to some extent) the issue of voting in classes of shareholders as the law has been developed in Australia.

Additional amendments

If the proposed amendments to the Companies Act are enacted, the Panel recommends providing a statutory exemption from the application of the Takeovers Code where the Panel has provided a "no objection statement" for a code company involved in a Part 15 scheme of arrangement.

The Panel also recommends additional amendments be made to the Companies Act to ensure that the Panel has all the necessary statutory functions and powers to undertake its new role. This will include the right for the Panel to be heard in court where it opposed a transaction being undertaken as a scheme under the Companies Act.

Next Steps

In Bell Gully's view, the current reconstruction provisions of Parts 13 and 15 of the Companies Act are important and appropriate mechanisms to achieve the objectives contemplated by the legislature when passing that Act. We continue to believe that the proposed changes are unnecessary. The existence of schemes and amalgamations provide market participants with an array of options which enable them to match their individual situations with the most appropriate mechanism.

It is now, however, up to the Government to take the next step. Given that the proposed changes involve potentially significant amendments to the Companies Act, and would substantially increase the role and powers of the Panel, it is to be hoped that there will be an opportunity for an independent review of the proposals (possibly by the Law Commission) and a full opportunity for interested parties to make submissions.

If the proposed reforms are to be introduced, we believe it is important that the criteria to be applied by the Panel in issuing "no-objection statements" are clearly identified and, preferably, that they be incorporated into the Takeovers Code.

To view a copy of the following documents: the Takeovers Panel's press release on its latest recommendations; the Takeovers Panel's Explanatory Memorandum; the Regulatory Impact Statement; and the Recommendations to the Minister of Commerce, visit the Takeovers Panel's website at www.takeovers.govt.nz.

 

For further information please contact your usual Bell Gully corporate adviser.

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.