CODEWORD

The protracted takeover process for control of Oyster Bay Marlborough Vineyards Limited began in July 2005 when Delegat’s Wine Estate Limited (Delegat’s) and Peter Yealands Investments Limited (PYIL) each made partial takeover offers for Oyster Bay.

The Delegat’s offer was due to close on 19 September 2005. It had been successful in that Delegat’s had sufficient acceptances to take its holding of voting rights in Oyster Bay to 50.1% after the offer had closed and after scaling.

On 19 July 2005 Oyster Bay had issued a target company statement in response to the Delegat’s offer. That statement included an independent adviser’s report by Ferrier Hodgson & Co.

The target company statement is a fundamental requirement under the Code in response to a takeover offer. It is issued by the directors of the target company to assist shareholders in deciding whether to accept or reject the offer. The statement contains important factual information about the target company, an independent adviser’s report, a recommendation by the directors in relation to the offer and the basis for that recommendation.

The Panel received complaints from PYIL which had made a competing but unsuccessful partial offer to obtain 51.1% of the voting rights of Oyster Bay, and from David Rankin, an Oyster Bay shareholder.

PYIL’s first complaint related to the non-disclosure of certain detailed information about Oyster Bay’s grape harvest and the sale of its grapes to Delegat’s under existing long-term arrangements. After considering information summoned from Oyster Bay and comments from the independent directors, the Panel decided to take no action.

PYIL’s second complaint, and that by Mr Rankin, concerned the market value of Oyster Bay’s vineyard properties. The target company statement referred to a net tangible asset basis of valuation of Oyster Bay using a valuation for the vineyard properties prepared by Logan Stone Limited. Logan Stone used a discounted cash fl ow or income approach in its valuation of the vineyard properties. The reason given for adopting the income approach was that there was said to be no relevance in the market value of the properties because they were subject to long-term agreements with Delegat’s.

Both Mr Rankin and PYIL alleged that the target company statement should have included information about the market value of Oyster Bay’s vineyard assets, unencumbered by the long term agreements with Delegate’s.

The independent directors of Oyster Bay submitted that this information would be inappropriate and misleading for shareholders because any sale of the properties would be subject to contracts with Delegat’s.

The Panel considered that information about the market value of Oyster Bay’s properties, suitably qualified to reflect Delegat’s contractual entitlements, may be information that could reasonably be expected to be material to decisions by Oyster Bay’s shareholders to accept or reject Delegat’s offer. By issuing the target company statement without this information the Panel considered Oyster Bay may not have complied or may not be complying with clauses 18(5) and 24 of Schedule 2 of the Code.

The Panel decided on 14 September 2005 to hold a meeting under section 32 to determine the issue. Interim restraining orders were made directing Delegat’s not to declare its offer unconditional and restraining Oyster Bay from registering the transfer or transmission of any securities arising from the acceptances of Delegat’s offer. The restraining orders did not prevent Oyster Bay shareholders from accepting Delegat’s offer prior to its close on 19 September 2005. The purpose of the orders was solely to preserve the status quo until the matter was resolved.

The Panel met on 20 September 2005 to consider the matter in light of the relevant provisions of the Code which are:

• Clause 18(5) of Schedule 2 which requires the target company statement to include any other information about the assets, liabilities, profitability, and financial affairs of the target company that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer; and 

• Clause 24 of Schedule 2 which requires the target company statement to include any other information not required to be disclosed by this schedule that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.

Clauses 18(5) and 24 require disclosure in the target company statement of all information about the assets and financial affairs of the target company, or any other information, that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer. As to the appropriate interpretative approach to clauses 18(5) and 24, the Panel considered that the directors of target companies should take into account the following points:

• The question whether particular information could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer is essentially a question to be resolved having regard to the particular circumstances.
• The issue of reasonableness requires an objective test based upon an hypothetical reasonable director in the position of having responsibility for preparing the target company statement, and without reference to the actual subjective views of the target company directors in that position. Directors have to be careful to avoid prejudging the capacity of their company's shareholders to assimilate complex information. The responsibility rests with directors to provide information in a form which allows shareholders the opportunity to understand and interpret it for themselves.
• The issue of materiality also requires an assessment as to whether the offerees would give some relative weight to the particular item of information, and include it as one of a number of factors to be considered, when determining whether to accept or reject the offer. The particular item of information on its own does not have to be so significant as to be likely to determine an accept/reject decision one way or the other, but nor should it be so insignificant as to have no bearing on such a decision.
• Particular care is required where the information is forward looking and relates to or assumes a state of affairs which may or may not eventuate. Directors must assess the potential impact of the information on the decision of shareholders to accept or reject an offer and consider whether disclosure is appropriate.

It was common ground between the parties that Oyster Bay's vineyard assets had an unencumbered market value (assuming a scenario without the long term contracts in place) of the order of $90 million, resulting in a net tangible asset assessment of Oyster Bay's shares at above $8.00 per share in June 2005 on that basis.

The factors which the Panel considered to be material to its deliberations on these matters included:

• the unencumbered market value of Oyster Bay's vineyard assets of $90 million implies a net tangible asset amount of Oyster Bay of $8.00 per share, significantly above Delegat's offer price of $4.00 per share;
• Delegat's had stated that long-term security of grape supply was important and that it did not intend to withdraw from its contractual arrangements with Oyster Bay;
• there was evidence that major international breweries and wine-making companies were interested in securing grape supply by acquiring New Zealand vineyards and appeared to be influencing the rising price of vineyard properties in Marlborough and elsewhere;
• one of the "Key Features” of the investment, as promoted in Oyster Bay’s original 1999 prospectus, was:
  Benefit from the value of the underlying properties. The net asset value per share (as per Logan Stone valuations) will be $1.04 per $1 invested upon subscription. Prime Wairau Valley viticultural land has appreciated strongly in value since 1995.

• Oyster Bay’s reported vineyard asset values have declined between the 2001 and 2004 Annual Reports against a background of increasing land values in Marlborough during the same period;
• the nature of the contractual arrangements with Delegat's suggests that it would be extremely unlikely that Oyster Bay could sell its vineyard assets on an unencumbered basis;
• if Delegat's obtains majority voting control of Oyster Bay it could potentially control the composition of the board, making it even less likely that Oyster Bay would initiate moves to sell the vineyard assets or unwind the long term contracts; and
• if Delegat's obtains majority control, and in the absence of information about unencumbered market value, there was greater potential for value transfer if Delegat's were to acquire further shares by way of the "creep" provisions of the Code in future years at share prices that are reflective more of income-based valuations than of vineyard market valuations.

On the basis of this analysis, and having regard to the evidence available to it, the Panel decided that information about the market value, encumbered or unencumbered, of Oyster Bay's freehold and leasehold vineyards could reasonably be expected to be material to the making of a decision by Oyster Bay shareholders to accept or reject the Delegat's offer.

The Panel determined that it was not satisfied that Oyster Bay had complied with the Code in that the target company statement omitted information (relating to the market value, encumbered and unencumbered, of Oyster Bay's freehold and leasehold vineyards) that could reasonably have been expected to be material to the making of a decision by Oyster Bay shareholders to accept or reject the Delegat's offer.

In the subsequent Court proceedings the High Court endorsed the Panel’s approach to materiality. Miller J said, “I have reached the clear view that the encumbered and unencumbered values of the vineyards was information that could reasonably be expected to be material to shareholders.” He also said, “I have concluded that the Panel was entitled to conclude that [the encumbered and unencumbered values of the vineyards] might reasonably be expected to be material to shareholders. For the same reasons, I am satisfied that Oyster Bay has failed to comply with rule 46 of the Code …”

When this commentary was prepared the matter was still before the High Court as to the appropriate orders to be made as a consequence of the Court’s finding that Oyster Bay had failed to comply with Rule 46 of the Code.