CODEWORD

Policy background

The Takeovers Panel has been concerned for some time about the increasing use of schemes of arrangement under the Companies Act as a means of avoiding the provisions of the Takeovers Code when seeking to change the ownership or control of Code companies.

The Panel issued discussion papers (4 April 2006 & 19 June 2006) seeking the market’s comment on possible changes to the Companies Act and Takeovers Code where it is intended to change ownership or control of Code companies by an amalgamation under Part 13 of the Companies Act or a scheme of arrangement (which can include an amalgamation) under Part 15 of the Companies Act.

The Panel subsequently recommended changes to the law to the Minister of Commerce. The changes would:

• remove schemes and amalgamations from the Code; but
• make the Companies Act processes (where they affect the control of Code companies) take account of the principles of the Code and be subject to the comment or approval of the Panel.

These recommendations are currently with the Minister.

In May 2006, the Panel told the market that, pending the review of the law governing schemes and amalgamations, it would take steps to mitigate the use of schemes of arrangement to avoid the protections for shareholders contained in the Code. One of these steps was to seek to be heard by the High Court when proposed schemes of arrangement involving Code companies are being considered.

The Panel believed that submissions from the Panel would assist the Court in its supervision of schemes of arrangement. Submissions would address the use of the scheme procedure and the protections contained in the scheme for shareholders, particularly minority shareholders, taking into account the special status of the control of Code companies contained in the Takeovers Act 1993 and the Code.

The Panel’s actions were limited to schemes of arrangement under Part 15 of the Companies Act because, unlike amalgamations under Part 13, the terms of schemes, and their ultimate coming into force, require High Court approval.

Details of the scheme of arrangement

In late September 2006, the Panel became aware of an application for the High Court to approve an amalgamation under Part 15 of the Companies Act. The proposed scheme was to amalgamate three property investment companies of the Dominion Group - Dominion Income Property Fund Limited (Dominion Income), Property Fund Thirty-One Limited (PF31) and Dominion Newmarket Limited (Newmarket) - all of which are managed by Dominion Funds Limited (Dominion Funds). PF31 and Newmarket were to be amalgamated with Dominion Income, which was to be the surviving company.

Dominion Income and PF31 were Code companies, having assets of more than $20 million and more than 50 shareholders. Newmarket became a Code company on 25 October 2006 when the $20 million minimum asset threshold was removed from the definition of Code company (through the Takeovers Amendment Act 2006).

 Each of the three amalgamating companies had three forms of issued securities: Group A shares, Group B shares and debentures.

Group A shares are ordinary voting shares. These shares can be voted on all company resolutions but holders only have the right to appoint one director, who must be part of the Money Managers Investment Review Panel. (In each case the appointee has been Mr Douglas Lloyd Somers-Edgar.)

Group B shares are all issued to the directors of the manager, that is, Dominion Funds. Holders of Group B shares have the right to appoint the remaining three directors of each company, but do not share in any distributions by the companies. The other directors of each company are Alastair Burkitt Hasell, Ian Crayley Hasell and Paul John Duffy.

Debentures are debt securities “stapled” to the Group A shares and do not carry voting rights.

Each amalgamating company has a widely spread shareholding with no individual shareholder in any company having more than 2% – 3% of the voting rights.

When the Panel became aware of the amalgamation, the High Court in Auckland had already made orders under s 236 of the Companies Act (applied for by the Dominion Group) which established the basis on which the amalgamation proposal was to be put to the shareholders of each company for their approval.

In essence these initial orders said that the scheme required approval by special resolution (75% of each class of shareholder of each company entitled to vote and voting). Voting was to be by postal ballot. The Court dispensed with the requirement for a meeting of shareholders of each company and with the requirement for a minimum quorum of voters, although quorum in each company’s constitution – two voters – was very modest anyway. The Court also ordered that a minority buy-out right should not apply in this case. A minority buy-out under the Companies Act allows shareholders who vote against the proposal to be bought out of their holding for a fair and reasonable cash sum. This requirement is an integral feature of an amalgamation under Part 13 of the Companies Act i.e. where there is no court involvement.