Supreme Court has last word on the effect of a Part 15 amalgamation on third party contracts

In the final chapter of Elders New Zealand Ltd v PGG Wrightson Ltd, the Supreme Court has upheld the Court of Appeal and High Court interpretation of court ordered amalgamations under Part 15 of the Companies Act 1993. In this case note Bell Gully partner Jayne Kirton and solicitor Neetha Alex outline the court's decision and discuss its implications.

Reaffirming the previous courts' decisions, the Supreme Court in Elders New Zealand Ltd v PGG Wrightson Ltd¹ held that an amalgamation (whether effected by Part 13 or Part 15 of the Companies Act) has the effect that the amalgamated company stands "in the shoes of the amalgamating companies". The amalgamating companies fuse into and continue in the amalgamated company. The amalgamating companies' rights and liabilities therefore continue in the amalgamated company without need for a process of transfer or vesting of such from the former to the latter. The amalgamated company is consequently not treated as a different party for the purposes of third party contractual arrangements.

The background facts

Elders and Wrightson were the co-owners of stock saleyards either in their own names or through certain of their associated companies. The parties' rights in relation to such saleyards were regulated by various agreements and the constitution of the co-owned companies, all of which granted each co-owner a right of pre-emption if the other sought to "transfer...or otherwise dispose...of its interest in the saleyards".

Wrightson and Pyne Gould Guiness subsequently sought and obtained High Court approval for entry by the parties into a scheme of arrangement under Part 15 of the Act pursuant to which Wrightson would amalgamate into Pyne Gould Guiness Limited (to be renamed PGG Wrightson Limited post-amalgamation). Elders brought proceedings in the High Court seeking a declaration that the arrangement involved a disposition by Wrightson to PGG Wrightson of Wrightson's interest in the co-owned companies thereby triggering Elders' pre-emptive rights in relation to such disposition.

The High Court found in favour of PGG Wrightson on the basis that an amalgamation implemented under Part 15 of the Act can have the same legal effect as an amalgamation effected under Part 13. Applying the decision in Carter Holt Harvey Ltd v McKernan², the High Court therefore concluded that Elders' rights of pre-emption had not been triggered as Wrightson's interest in the co-owned saleyards continued in PGG Wrightson without need for a transfer/disposal to PGG Wrightson.

Following dismissal of an initial appeal to the Court of Appeal, Elders subsequently obtained leave to appeal to the Supreme Court.

The decision

Elders submitted that Part 15 of the Act is expressed in terms materially different from those of Part 13. Two significant aspects of Part 13 amalgamations, being the concepts of 'fusion' and 'continuance', are contained in section 219 of the Act. These concepts, which formed the basis of the decision in Carter Holt Harvey Ltd v McKernan³, are the notion that amalgamating companies (along with their rights and liabilities) fuse into and continue in the amalgamated company without calling into play the dynamics of a relationship involving a predecessor and successor. Part 15 of the Act does not contain a provision which is equivalent to section 219. Elders therefore contended that an amalgamation under Part 15 necessarily requires the amalgamated company to acquire each amalgamating company's assets and liabilities by a process of transfer or vesting.

Elders argued that this need is reflected in the court's power under section 237(1) to make orders transferring or vesting property to give effect to a court approved arrangement. Elders further sought to support its interpretation of the legal effect of Part 15 amalgamations by citing the legislative history of that part of the Act. Part 15 is based on provisions that were first enacted in the United Kingdom and which were interpreted in Nokes v Doncaster Amalgamated Collieries Ltd⁴. The House of Lords decided by a majority in Nokes v Doncaster Amalgamated Collieries Ltd⁵ that such provisions did not facilitate a statutory mechanism to effect or enable assignment of a contract of service from an amalgamating company to the amalgamated company on the basis of potential prejudice to third parties which such an interpretation would cause.

The Supreme Court found that the concepts of 'fusion' and 'continuance' apply to all amalgamations, whether effected by way of Part 15 or Part 13 of the Act. On that basis, the court held that Wrightson, along with its rights and liabilities, fused into and continued in PGG Wrightson. PGG Wrightson (as the amalgamated company) thereby holds the property of Wrightson by operation of law as if it were still Wrightson. There was accordingly no transfer or disposition of property triggering Elders' pre-emptive rights and Elders' appeal was dismissed.

Factors the court considered in reaching its decision were:

• Section 219 was specifically adopted for the purpose of providing a convenient mechanism to bypass the administrative complexity associated with having to effect separate transfers of property to the amalgamated company. It was therefore unlikely that Parliament would seek to retain such complexity in Part 15.

• The use of the term 'amalgamation' in both Parts 13 and 15 of the Act supports giving the term a consistent meaning.

• Section 237(1) is broadly framed and is intended to give effect to arrangements and compromises as well as providing greater flexibility if fusion of the amalgamating companies is inadequate on its own.

Practical implications

The decision of the Supreme Court clearly confirms that the meaning and effect of an "amalgamation" under Part 15 of the Act is the same as an "amalgamation" under Part 13. An amalgamated company continues to enjoy all advantages (and has the burden of all liabilities) previously conferred on any of the amalgamating companies. It is not to be treated as a new party or a different party to third party contractual arrangements.

Parties should therefore take care when drafting the terms of pre-emptive rights and change of control provisions to ensure that any trigger clauses are appropriately worded. Failure to do so may mean that such clauses will apply in a manner that does not suit the parties' requirements in the event that counterparties are involved in an amalgamation.

¹ [2008] NZSC 104.

² [1998] 3 NZLR 403.

³ Ibid.

⁴ [1940] AC 1014.

⁵ Ibid.

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