Source: https://www.takeovers.govt.nz/guidance/codeword/issue-28/law-changes-for-schemes-of-arrangement-move-forward/
Timestamp: 2019-10-23 13:56:34
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Law Changes for Schemes of Arrangement Move Forward | Takeovers Panel
Guidance » CodeWord » Issue 28 » Law Changes for Schemes of Arrangement Move Forward
Corporate control-change transactions involving Code companies, which are effected under Part 13 (amalgamations) or Part 15 (schemes of arrangement) of the Companies Act 1993, provide a means, or a loophole, to avoid the Code. Market participants will be aware from consultation undertaken by the Panel that the Panel has been considering how the law might better align Part 13 and Part 15 of the Companies Act with the Code, whilst retaining the flexibility offered by schemes.
This article provides an update on progress on bringing the Panel’s proposals into law, an overview of the proposals themselves, insights into some of the concerns which the Panel’s proposals intend to address and a contrast between the Panel’s proposals and the schemes process in Australia.
Progress of Panel’s proposals into law
On 9 August 2010, Cabinet approved the Panel’s proposals. Law changes will be made to Part 13 and Part 15 of the Companies Act in relation to amalgamations and schemes of arrangement involving Code companies. The Minister of Commerce has indicated that he is looking for the earliest opportunity to get the proposals into legislation.
Process for schemes of arrangement under current law
Part 15 of the Companies Act enables the High Court to require a scheme proposal to be approved by the shareholders of each company involved in the scheme. The Court also must approve the scheme to enable it to come into effect.
The common law has consistently required that schemes be approved by shareholders representing at least 75% of the votes cast by those who vote on the proposal. There are also common law rules on the information that must be provided to shareholders, and the Court reviews the scheme documentation before it is put to shareholders.
The Companies Act does not prescribe the information that is to be sent to shareholders, but, under a broad principle prescribed by the common law, the information must be sufficient to enable a reasonable shareholder to understand the nature and implications of the scheme proposal.
The scheme documentation is prepared by the promoters of the scheme and, as a matter of practice, the scheme’s promoters are applicants for the initial hearing where that documentation is put to the Court for approval.
How the new law will operate
The prospective law changes are as follows:
(a) the High Court will only be able to approve a scheme that would have any effect on the voting rights of shareholders of a Code company if:
(i) the Court is satisfied that the shareholders of the Code company would not be adversely affected by the transaction not being undertaken under the Takeovers Code; or
(ii) the promoters of the scheme produce to the Court a ‘no-objection’ statement from the Panel.
However, the Court need not approve a scheme even if a no-objection statement is produced to the Court;
(b) the following voting thresholds will be stipulated for shareholder resolutions to approve the scheme:
(i) the shareholders voting in favour must represent at least 75% of the votes cast on the resolution at each meeting of each interest group of shareholders;
(ii) the interest groups must be determined by the Court, with legislative guidance, for the purposes of voting on the resolution; and
(ii) the shareholders voting in favour must represent more than 50% of the total voting rights of the Code company, aggregated across all of the interest groups in that company;
(c) legislative guidance will be provided to the Court, by codifying the common law principles, for determining an interest group for the purposes of voting on the resolution;
(d) if the Court approves the scheme (as well as the shareholders approving the scheme), then the Code company would be statutorily exempt from the application of the Code in relation to the control changes under the scheme; and
(e) while short-form amalgamations under Part 13 of the Companies Act (involving amalgamations of, or with, wholly-owned subsidiaries) will be retained for all companies, long-form amalgamations will be prohibited where an amalgamating company is a Code company. However, long-form amalgamations for all companies will still be able to be undertaken under Part 15 of the Companies Act.
The law changes will make New Zealand’s takeovers and schemes/ amalgamations regimes similar to the regimes in Australia, but with the following differences:
(a) under an ‘anti-avoidance’ provision in the Australian legislation, the Court cannot approve a scheme that would enable a person to avoid any provision of Chapter 6 (the takeovers provisions) of the Corporations Act 2001.[1] A strict interpretation of that anti-avoidance provision causes problems in Australia, so the law changes in New Zealand take up the approach that is applied in practice in Australia, viz., that the Court must be satisfied that the shareholders would not be adversely affected by the transaction not being undertaken under the takeovers rules;
(b) the New Zealand proposals avoid Australia’s headcount approval vote of ‘50% in number’ of each interest group. Instead, there will be a requirement for a majority of total voting rights (aggregated across all interest groups) to have been voted in support of the scheme;
(c) in Australia it is the Australian Securities and Investments Commission (“ASIC”) that provides the no-objection statement. The Panel would assume that role under the New Zealand proposals; and
(d) under the no-objection statement process proposed for New Zealand, the Panel will require a report on the merits of the scheme to be prepared for the shareholders by an independent adviser who is approved by the Panel. This mirrors the requirements imposed by the Code in respect of control changes which are effected under the Code. The Panel will apply the same strict criteria for the approval of independent advisers for a scheme as it applies for Code transactions. The Panel will also require disclosure of information to shareholders that is similar to the disclosures required under the Code.
Panel’s positive view of schemes
When making its recommendations in 2008 to the Minister of Commerce on the proposed law changes, the Panel took the view that schemes are a legitimate and valuable means for undertaking complex corporate transactions in New Zealand. The Panel still holds that view. The ability to carry out corporate transactions under a Companies Act process, rather than under the Code, provides economically sensible commercial flexibility.
The Panel’s concerns regarding the use of schemes and amalgamations that involve Code companies is centred on both their lack of consistency with the disciplines and protections of the Code, and their lack of regulatory oversight – especially for Part 13 amalgamations.
The amalgamation process under Part 13 of the Companies Act requires the boards of the amalgamating companies to each pass a resolution that the amalgamation is in the best interests of the company. The process also requires the support of 75% of the shareholders who attend the meeting to consider the amalgamation proposal. The Registrar of Companies receives the amalgamation documentation after the shareholders have voted on the proposal, and checks that the statutory requirements for the documents and certificates required by Part 13 of the Companies Act have been met. The Registrar’s statutory role is purely administrative – it is not an oversight role.
Schemes of arrangement and amalgamations under Part 15 of the Companies Act, in requiring Court approval, do, by contrast with Part 13 amalgamations, provide a degree of regulatory oversight.[2] The Panel’s view is that the degree of that oversight is limited by reason of the schemes process itself, the burden placed on the Courts by commercially complex corporate transactions and the lack of contestability in the process.
Court approval is not a panacea
The main problem with the current schemes process is that the Courts only hear from the promoters of the scheme. Although there is provision in the Companies Act for interested persons to appear and be heard by the Court, that route is not realistically within the reach of retail investors.
In the absence of an ‘interested’ third party application to the Court, there is no hearing and the scheme proceeds before a Judge ‘on the papers’ – and that leaves a Judge in a difficult position. Not only may Judges not have the expertise to confidently determine whether the scheme proposal and the information that will be sent to the shareholders is adequate, but they also do not have the benefit of a ‘contradictor’ or opposing party, which the adversarial system of law relies upon, to ensure that all the issues are put before a Judge.[3]
Calls for greater regulatory protections for schemes in Australia
The current schemes process in New Zealand is comparatively poorly regulated for the reasons mentioned above. Contrast this with the regime in Australia, where the no-objection process has been in place for more than 20 years. Yet, even there, recent comments by retired senior Judge Kevin Lindgren advise caution for anyone who thinks that the Court’s supervision of a scheme provides any kind of guarantee about the appropriateness of the scheme for the shareholders. Justice Lindgren’s concerns were expressed in the light of recent global experiences about the role of ‘independent’ directors and ‘independent’ advisers – especially when related party transactions are involved.[4]
The comments by Justice Lindgren do not discuss ASIC’s role in providing a no-objection statement.[5] Despite ASIC’s role with the no-objection process, Justice Lindgren still refers to the difficulties for the Court because there is no contradictor to tell the Judge about any problems with the scheme or with the shareholder information.
One of the recommendations in a 2009 report on schemes in Australia, by the Australian Government’s Corporations and Markets Advisory Committee, is that the Court should be able to ask ASIC for assistance to fulfil the role of a contradictor or amicus.
It is quite telling that, despite the well-regulated schemes process in Australia, senior members of the Australian judiciary there are seeking to have schemes better regulated, expressing the same concerns about the Court’s role (or perceived role) that the New Zealand Panel holds with the current New Zealand schemes process.
As noted above, one of the differences between the proposed law changes here and the Australian position is that the Panel, the dedicated takeovers regulator, would take responsibility for the no-objection process and implicitly provide an expert view to the Court on the appropriateness of a scheme (rather than a takeover) for shareholders. In Australia the no-objection process is undertaken by ASIC, a body with a very wide regulatory mandate.
In summary, the Panel’s proposals in this particular area would provide the Court with assistance, whether through the weight accorded to a Panel no-objection statement that is produced to the Court, or as a contradictor of a scheme where the Panel has not provided a no-objection statement, by a regulatory body with expertise in mergers and takeovers. It may be that the Panel could also be available to assist the Court even where a no-objection statement has been provided, to act as an amicus for the Court.
‘More than 50% of total voting rights’ voting threshold
In formulating its proposals, the Panel gave careful consideration to the view expressed by some market practitioners that the second voting threshold for approval of a scheme under the proposed law changes (the aggregated more than 50% of total voting rights, which aligns with the threshold imposed by the Code for the level of acceptances needed for a takeover offer) would be impossible to reach. The argument is that shareholder ‘apathy’ about voting on company matters would mean that schemes could no longer be used for doing takeovers or mergers, because a scheme would fail to secure approval by a majority of total voting rights. The Panel rejects that argument.
In the 2006 Court of Appeal decision concerning Dominion Income Property Funds Limited (“Dominion”),[6] the Court acknowledged the forceful arguments of Dominion’s legal representatives about the difficulties involved in getting approval by the holders of more than 50% of total voting rights. The Court of Appeal also opined that it would “not necessarily be impossible” to reach that threshold. The Court acknowledged that “the rules under which voting takes place will necessarily have an impact on voting behaviour”.[7]
In other words, the Court of Appeal has acknowledged that if the rules require that more than 50% of total voting rights have to be voted in approval of the scheme, and that fact is made clear to all the parties including to the shareholders, then the scheme’s promoters and the shareholders will all behave differently than under the current rules.
As it transpired, although the Court did not order that the more than 50% of total voting rights threshold be met for the Dominion scheme, the Panel was advised of the voter responses for the scheme, and they showed that that threshold was comfortably met for each of the Code companies involved in the scheme.
The Panel believes that if a scheme’s promoter cannot convince the shareholders controlling a majority of the voting rights that the scheme would be beneficial to them, then the promoter should not have a mechanism (the current schemes regime) to compulsorily acquire all the shares in the absence of that support. Compulsory acquisition is the effective outcome of an approved scheme.
If the scheme’s promoter considers that it will not secure the necessary shareholder vote, the takeover or merger could be carried out under the Code. Shareholders react differently to a takeover under the Code (which is effectively a buy/sell contract) than they do to voting about a change of control.
Codification of common law principles
The Panel’s proposal that the common law on identifying interest groups (for the shareholder meetings for considering and voting upon the scheme) be codified, relates to the broad problem that the schemes regime in New Zealand has been in some disarray since the implementation of the Companies Act. Some practitioners have suggested to the Panel that the Companies Act effectively did away with the common law requirements regarding shareholders voting in interest groups. Other practitioners, however, do not accept that position and continue to arrange for shareholders to vote in interest groups on a scheme proposal.
The client focus of practitioners to obtain deal certainty and success, coupled with the lack of a contradictor to advise the Court about any problems with a proposed scheme, sit behind the proposed codification of the common law on how to identify interest groups. This is a significant issue because one of the areas where this would have an impact is where the promoter of the scheme is a major shareholder who, together with its associates, could virtually vote the scheme through on their own. Under the Australian law and practice where there is a strong focus on voting in interest classes and an expectation that the interest classes will be carefully identified, the scheme promoter and its associates would have to vote in a separate interest group in order to ensure that the scheme was approved by the requisite majority of ‘disinterested’ shareholders.
For the more than 50% of total voting rights threshold, the votes of the major shareholder and its associates would be aggregated with the votes in favour from the other interest groups.
An advanced look at the new regime in action
In June 2010 the Panel granted an exemption from the Code in relation to a scheme of arrangement that was effected under Part 15 of the Companies Act, involving Code company Craigs Investment Partners Limited (“Craigs”) and the New Zealand subsidiary of the Deutsche Bank Group[8]. The exemption provides a useful insight into the approach the Panel will take for the giving of a no-objection statement under the new Companies Act regime. Of course, when the law changes are implemented, exemptions from the Code will no longer be required for a scheme.
For the Craigs exemption, the Panel was asked by the scheme promoters to provide a no-objection statement. The Panel did so, because the scheme promoters included all the information in the scheme documentation that the Panel had required, including an independent adviser’s report prepared by an adviser approved by the Panel. The Panel’s information requirements for the Craigs exemption were consistent with the information requirements of the Code.
The promoters had also agreed to the interest groups identified by the Panel, for holding separate shareholder meetings, and advised the Court of those interest groups. The more than 50% of total voting rights threshold was also required, and the scheme was approved in accordance with that threshold and with the 75% threshold of shares voted in each interest group.
Select Committee process – you can still have your say
The changes to the Companies Act have yet to be considered by Parliament. Once a Bill is introduced into the House, the changes will undergo the Select Committee process. Interested parties will have an opportunity then to make submissions to the Select Committee on these law changes.
[1] Section 411(17)(a) Corporations Act 2001 (Cth). The alternative to the anti-avoidance provision is that a no-objection statement from the Australian Securities and Investments Commission is produced to the Court.
[2] Amalgamations do not have to be effected under Part 13 of the Companies Act. An amalgamation may be effected by way of scheme of arrangement under Part 15 (section 238 of the Companies Act). This avenue might be chosen by a scheme promoter, for example, to avoid the minority buyout rights that are available under section 110 of the Act for dissenting shareholders.
[3] An article in NZLawyer extra, 7 May 2010, describing an interview in April 2010 of retired Australian Federal Court Judge, Kevin Lindgren, by the Australian Financial Review, refers to his and his judicial colleagues’ concerns about the heavy burden on Judges having to consider complex scheme documentation without the benefit of a ‘contradictor’, because there are usually no parties before the Court who oppose a scheme being put to the shareholders: (http://www.nzlawyermagazine.co.nz/NZLawyerextra/bulletin1/extra1N1/tabid/2291/Default.aspx).
[4] Ibid. Under the new regime in New Zealand, the Panel would require a properly ‘independent’ adviser to provide a merits report for the shareholders, under its no-objection statement role.
[5] In almost all schemes, the promoters obtain a no-objection statement from ASIC, because if ASIC does object to a scheme, or if the promoters do not seek a no-objection statement, ASIC appears at the Court hearing to oppose the scheme.
[6] Dominion Income Property Fund Limited & Ors v Takeovers Panel, CA229/06.
[7] Ibid, at paragraph 36.
[8] Takeovers Code (Craigs Investment Partners Limited) Exemption Notice 2010 (SR2010/160).