Worth Richard: Companies (Minority Buy-out Rights) Amendment Bill — Second Reading In Committee Third Reading 
Text is incorporated into the Bound Volume 
Worth Richard: Companies (Minority Buy-out Rights) Amendment Bill — Second Reading In Committee Third Reading 
[Sitting date: 02 September 2008. Volume:649;Page:18526. Text is incorporated into the Bound Volume.] 
Dr RICHARD WORTH (National) 
: 
 On one view of it the Companies (Minority Buy-out Rights) Amendment Bill might not be considered interesting but it affects a very substantive change to the law. All tributes go to the honourable Minister Lianne Dalziel who at all times has kept an open mind on the merit of this legislation and who has been prepared to make change where there was a warrant for doing that. 
These changes being made by this legislation are to the Companies Act 1993 which of course is a code that deals with a whole lot of aspects of corporate activity in New Zealand. The Act constitutes a code if you like for those activities that are very much at the heartland of New Zealand business. The provisions relating to minority buy-out rights are contained in sections 110 to 115 so the provisions are not very extensive but they raise essential issues of equity. The argument is really simple: if the goalposts are moved despite the shareholder’s opposition he or she is entitled to decide that he or she no longer wishes to be a player and to also be protected from losing financially by reason of a decision to leave the field. I think it is worthwhile citing a comment made by Alexander Khutorsky who is well known in this area of corporate law for what he said about the intended functioning of buy-out provisions. In a merger context he said this: “In theory the existence of appraisal statutes has a two-pronged effect on merger transactions. First the appraisal remedy is supposed to guarantee that dissenting shareholders get a fair price for their equity stakes. This prong of the appraisal statute is embodied by a procedural scheme whose end result is a judicial valuation of the minority stake in the target with attendant money damages where appropriate. Perhaps more important than the actual exercise of the remedy is the ex ante effect which the mere existence of the remedy is supposed to produce. This second prong works by inhibiting the incentives of majority owners to act strategically by providing for the possibility of a threat of litigation and uncertain damages awards. The corporate planner’s assumed preference for certainty coupled with potential cash-flow constraints in meeting potentially sizeable judicial awards should encourage the planner-majority owner to offer fair consideration in freeze-out transactions.” That is quite turgidly but thoughtfully worded. It is a simple enough concept: a person is a shareholder in a company the other shareholders do something that the person does not like so what are the rights of that person? So we see in this bill the setting up of a code—the amendments to and filling out of provisions in the existing law—that gives rights to the shareholder who wants to get out. In money terms that is the way in which those rights have been exercised. 
There is a history in all of this of course and in fact it is quite a long history. But what prompted the Government to move—actually to move quite slowly—was a case called  
Natural Gas Corporation Holdings Limited v Infratil 
1998 Ltd 
. The judge in that case which is a trigger for all these changes being made today as this bill progresses started off by saying “To the best of the knowledge of the parties this is the first time that the minority buy-out rights sections have come before the court.” and “It is common ground that the minority buy-out rights sections are defective. Although they provide for the company to nominate a fair and reasonable price for the shares to be acquired they do not state at what date that price is to be ascertained. Nor do the sections make any provision for the company in nominating the fair and reasonable price to give any information to the minority shareholder of the basis of the valuation. Nor do the sections provide any mechanism for the completion of transactions falling within them. As already noted s 112(4) is silent as to the basis upon which the shares at issue are to be dealt with and the time when the company is required to pay the provisional price. Nor has the arbitrator power to make orders in respect of the completion of the transaction following the arbitration. Having created minority buy-out rights the Act fails to provide for important features of the transactions that can arise under them. In the context of the Act as a whole and its history that is understandable. However here there is a relatively substantial sum of money involved. In other cases there could be a substantial number of shareholders involved. While the Law Commission and the legislature may have been wise to avoid the complexity of some of the North American legislation it would seem essential that if the minority buy-out rights sections are to be effective they should be urgently reconsidered.” 
Against the background of those comments the Law Commission looked at this issue. It came up with a report; it suggested draft legislation. Parliamentary Counsel had a look at that legislation and made some changes. The Commerce Committee made some further changes. But these are the sorts of issues that arise: should notice be given of the availability of the buy-out rights along with notice of the special resolution sought to be passed? Should the company be required to give particulars of the basis on which its offer is being calculated? Should the statute specify the date at which the shares are to be valued or otherwise dictate the basis of valuation? Should the shareholder be required to convey title to the shares—Mr Brownlee alluded to this issue—at the same time that the shareholder has paid the price calculated by the company on the basis of the value as initially assessed by it? Should the legislation spell out broader powers that authorise the arbitrator to award compensation for costs and delay? And should the arbitrator have the power to make ancillary enforcement orders? This legislation that is before us today actually covers all those points. 
In the time I have remaining it is interesting for me to look briefly around the world to see how other countries and other jurisdictions have dealt with this issue. Delaware in the United States which I guess would be recognised as the state in the United States that has the most company registrations—more companies in the Fortune 500 are registered in Delaware than elsewhere—has I think pioneered standards of excellence in corporate governance and has specific provisions dealing with this. I will not go through those provisions but they talk about that need to establish a fair value for the existing shareholder. When we come to the Committee stage we will see that is not quite the way that New Zealand has approached the issue and it certainly was not the way that the approach was to be taken when the bill was introduced. In New York where they have similar provisions in the New York Business Corporation Law section 623—as the Minister reminded me last night—they use this concept of “fair value” the same as in Delaware. In Canada they talk about “fair value” in the context of the compensation award. 
The American Business Association has a model code where “fair value” is actually defined. We have not done it in that way. I think we have done it in a much more sophisticated way. But in the American Business Association model “fair value” means the value of the corporation shares determined in three circumstances. First immediately before the effectuation of the corporate action to which the shareholder objects; second using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal; and third—and this is quite significant—without discounting for lack of market ability or minority status except in certain cases. 
I commend this legislation as it has come back from the Commerce Committee with a number of changes that we are later to consider. Looking at section 110 of the Companies Act and the sections that follow it I think we have produced an outcome in a New Zealand context that is highly workable.