Brownlee Gerry: Companies (Minority Buy-out Rights) Amendment Bill — First Reading 
Brownlee Gerry: Companies (Minority Buy-out Rights) Amendment Bill — First Reading 
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GERRY BROWNLEE (National—Ilam) 
: 
 I welcome the Companies (Minority Buy-out Rights) Amendment Bill being referred to the Commerce Committee and National will most certainly give it the attention that it deserves. But anyone listening to that speech by the Minister in charge of the bill Lianne Dalziel factual and accurate though it was could well ask himself or herself what on earth this is all about. Although the Minister talked about the appropriately stated movements that occur in these situations I do not think she gave a fair outline of the circumstances this provision may trigger or for that matter what it is all about. So I will take some time in the House this morning to explain exactly how all this works.  
It is interesting that yesterday the House passed the provisions for the KiwiSaver legislation and the idea of that is to encourage more New Zealanders to save and to invest for their future. Many of those accumulated funds will end up being invested in companies that are domiciled both in New Zealand and overseas. When the companies are domiciled in New Zealand these laws will apply to shareholdings in those companies. The Companies (Minority Buy-out Rights) Amendment Bill is about giving shareholders or the representatives of shareholders an opportunity to exercise their judgment about the wisdom of holding shares where there might be a transaction inside the company that they have disagreed with.  
The provisions of the Companies Act say that shareholders have a specific right to engage in a discussion and then have a vote over major transactions within the company—over mergers and acquisitions inside the company and over a range of activities that are inside the normal activities of the company. These provisions are there to try to give the shareholders the right to determine what happens to that company. For example they can decide whether to liquidate the company. Those are rights that are held by the shareholders as opposed to the executive of the company and they are there to protect the investment that New Zealanders make in any particular entity.  
So how do these provisions kick in? Let us say that Company A decides it is going to expand by making an acquisition of Company B. The first company would be required to go to its shareholders to get a resolution empowering it to go into that particular transaction. Some of the shareholders might say no. They may then find themselves in a minority. So Company A goes ahead and acquires Company B. Those who had disagreed with that might say that this acquisition will cost them that the value of their investment will decline because of the move and that therefore they have the right to require the company to buy them out.  
We could give plenty of examples of such situations occurring where a big company has decided to take over another one because it might be in trouble—struggling just a little bit—and because it looked like a good acquisition at the time and as though there was a profit down the line somewhere if the big company could get it to go. I will not mention names but one only needs to look at the airline industry to see numerous examples of this sort of situation occurring. In a number of cases—and for various reasons I will not mention names—those companies fail and the investment by the shareholders is of course in that circumstance completely lost.  
This legislation protects those who have disagreed with that activity right at the start of the new entity coming together. They are able to say to the company: “I want to be bought out.”  
Hon Lianne Dalziel 
: That’s before the amalgamation. 
GERRY BROWNLEE 
: Yes that is right. The Minister actually knows a bit about this and I appreciate her nodding and affirming that what I am saying is absolutely correct. 
Hon Lianne Dalziel 
: Before the amalgamation. 
GERRY BROWNLEE 
: Well of course “before” Minister. [ 
Interruption 
] “Of course Minister. Yes Minister. Yes Minister.” That is what they say all the way through the Beehive all the time. The officials over there just say “Yes Minister.” even though they are not particularly happy with the current Government because the way it treats State servants is quite unbelievable. The Labour Government has no respect for State servants so its Ministers are just getting the “Yes Minister.” treatment from the public servants—and so they should.  
The decision is made by the shareholder who says: “I don’t want to be part of this. Buy me out.” This bill puts in place a number of technical measures for determining the value of those shares and then for the way in which the transactions between the exiting shareholder and the company are to be purported. It does as the Minister said come from the Infratil case and I think it is worth considering what the judge said in that case which was heard by the courts in the year 2000. He said: “It is common ground that the minority buy-out rights sections are defective.” So the judge identified that there was a problem with our current law that led to this new law coming on. He made a number of points about the rights of minority shareholders in these circumstances and continued: “However here there is a relatively substantial sum of money involved.”—there always is in these cases—“In other cases there could be a substantial number of shareholders involved.”—there usually is—“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.”  
The judge’s advice is to urgently reconsider things. That is why we have the legislation in front of us today but it is interesting to consider this idea that we should have done something urgently. In the judge’s conclusion to his judgment he refers to a statutory vacuum and said: “I regard the section as substantially flawed …” He is talking about the Companies Act and minority buy-out provisions as they existed. 
Hon Lianne Dalziel 
: 1993—who was the Government then? 
GERRY BROWNLEE 
: Interestingly the Minister over there is giving a bit of a commentary and I appreciate that. If only she had used up her 10 minutes she could have had so much more to say. The judge said: “If the minority buy-out rights sections are to be beneficial and workable they should”—as already indicated—“be urgently reconsidered.”  
This is how the Labour Government deals with small investors in this country. We are now under urgency urgently dealing with this matter 8 years after the judge said it would be a good idea. Unbelievable! What is more we had to look at dog control legislation first and consider that before we got to this. I think that indicates the priority that the current Government put on business in this country. We welcome this bill coming before the select committee because I think we will have to do some work around some of those calculation provisions. It is obvious that if there are a large number of people particularly in the executive of any particular business recommending a course of action to shareholders they will put as much gloss on that as they possibly can. It seems to us that to then have the right to subsequently value shares for the purpose of the minority buy-out is a little bit on the offside.  
One thing that worries me is that quite often these acquisitions are financed—[ 
Interruption 
] The Minister keeps shaking her head. I know it is difficult for her to understand. Goodness me I am trying to make it as easy as I can for her. Clearly those officials up in her office whom she and the rest of that Labour Government have brassed off have simply nodded at her and said “Yes Minister!” and told her she was right when she had got it wrong. But a lot of those acquisitions will be financed by some pretty heavy borrowing and what is really a concern here is how far those agreeing shareholders will have to agree to an extra level of debt in order to be able to cover the buy-out of those who have said no. That is a perfectly reasonable thing; the Minister can think about that. If 20 percent of the company says “No I don’t want to be in this.” and the company offers $100 for that company over there it will cost it $120 actually to go through with the acquisition we would assume.  
That issue is something we need to get much more clearly defined in the bill because shareholders expect the executive of their company to give them a good deal. That is why they hold the investment in the first place; they want to get a return on it. But I wonder where the requirement is in the bill—I cannot see it from the first reading that I have given the bill—that all shareholders are told the real cost of the acquisition and the buy-out costs. That provision does not seem to be there I tell the Minister but she should not worry: National will come to her rescue.  
National will be looking at this legislation very positively in the Commerce Committee. I think we will probably have to bring in some independent advisers on this one. I can see us bringing in some independent advisers because it is a very complex bill and I am distressed that the Minister does not understand it all.