CODEWORD

Introduction

As noted in CodeWord 56, the Panel has sent law reform recommendations to the Minister of Commerce and Consumer Affairs (the 2024 Recommendations). Included in the 2024 Recommendations were proposals for:

• applying certain Code rules to schemes of arrangement in relation to Code companies (Code company schemes); and
• introducing a new Code rule regulating deal protection devices (this proposed new rule would apply in relation to Code offers and Code company schemes).

The 2024 Recommendations are available here.

In light of the 2024 Recommendations, the Panel wishes to clarify how it intends to approach deal protection devices under the current regulatory settings.[1] The clarification follows on from, and expands on, the Panel’s commentary on this topic in CodeWord 54.

This clarification is intentionally general in nature and should not be read as a comprehensive statement of the Panel’s views. The focus of this clarification is deal protection arrangements between the target and offeror (or their associates).

Types of deal protection devices

The Panel generally conceives of deal protection devices as encompassing:

• Exclusivity arrangements – e.g., no-shop restrictions, no-talk restrictions, no-due diligence restrictions, matching rights and notification obligations; and
• Break fees – an amount payable by a target to an offeror if specified events occur and the offer fails (often described by reference to the events which trigger their payment);

that are set out in the scheme implementation agreement or in other standalone exclusivity arrangements agreed prior to the scheme implementation agreement.

The Panel's remit

The Panel’s role in relation to Code company schemes is to assist the Court. The primary way in which the Panel interacts with the Court is through issuing a statement that the Panel has no objection to an order being made under section 236(1) of the Companies Act 1993 (the Companies Act) in relation to the Code company scheme (a No-objection Statement). Receipt of a No-objection Statement is normally a critical step for scheme proponents as, under s 236A(2)(b) of the Companies Act, the Court may not make orders giving effect to a scheme unless:

• the applicant has filed a No-objection Statement; or
• the Court is satisfied that shareholders will not be adversely affected by the use of a scheme rather than a Code offer to effect the change involving the Code company.
  

In addition to considering whether or not to issue a No-objection Statement, the Panel may make submissions to the Court in relation to a Code company scheme. Examples of when the Panel may consider it appropriate to make submissions to the Court include:

• when the Panel considers an applicant’s submissions have not adequately canvassed material issues in relation to whether the Court should approve the scheme; or
• where the Panel considers its input might benefit the Court.

The Panel will consider the Re CM Banks test,[2] which sets out the assessment for whether or not the Court should approve a scheme. Of particular relevance to deal protection devices is the fourth limb of the Re CM Banks test, which provides that the scheme should be approved if the scheme is such that an intelligent and honest person of business, a member of the class concerned and acting in respect of their interest, might reasonably approve it.[3] This consideration includes whether the proposed scheme is fair and equitable.[4]

To determine whether a scheme is fair and equitable, the Court may consider the process used by the target board, including the terms of the scheme implementation agreement or other exclusivity arrangements agreed prior to any scheme implementation agreement. If the target board agrees to unreasonably restrictive deal protection devices, this may give rise to material issues under the fourth limb of the Re CM Banks test.

The Panel's approach to deal protection devices

While deal protection devices may facilitate offers which may not otherwise be made, they may also discourage competing offerors or unduly restrict a target from engaging with competing offers, thereby reducing competition for control of a company. Accordingly, the Panel encourages target boards to carefully assess the impact of any proposed deal protection device in the relevant circumstances and whether it is reasonable considering the value the potential transaction might provide to shareholders.

Paragraph 2.27(a) of the Panel’s Schemes of Arrangement Guidance Note provides examples of deal protection devices with which the Panel may have material concerns. These include “no talk” or “no due diligence” exclusivity provisions without a superior competing proposal exception,[5] excessively high break fees or “naked no-vote” break fees. Such potentially coercive structures may deny the opportunity for alternative transactions, undermine shareholders’ ability to determine the merits of a scheme and may be material for the assessment of the fourth limb of the Re CM Banks Ltd test.

Accordingly, if a scheme implementation agreement (or exclusivity arrangements preceding a scheme implementation agreement) includes a deal protection device which the Panel considers to be excessively restrictive to the extent that it raises concerns that may be relevant for the Re CM Banks Ltd test, then the Panel may:

• make a submission to the Court, setting out the Panel’s concerns, so that the Court may take them into account in deciding whether to exercise its discretion to sanction the scheme; and/or
• provide a qualified No-objection Statement, setting out the Panel’s material concerns with the deal protection arrangement, so as to draw the Court’s attention to the matter (or withhold the No-objection Statement).

The Panel wishes to be clear that it does not see this clarification as affecting what the Panel sees as standard market practice for exclusivity in New Zealand public M&A transactions. Rather, the Panel is seeking to clarify that excessive deal protection arrangements might attract scrutiny.

 Where parties are considering agreeing to deal protection devices that are outside typical market practice and would like to understand how the Panel may generally view them, they are encouraged to discuss their proposed approach with the Panel before agreeing to them. If the Panel has concerns with deal protection devices, its first step will always be to discuss those concerns with the relevant parties.