Transactions

BEFORE THE TAKEOVERS PANEL

Background

Abano is a company listed on the NZSX. As such Abano is a code company for the purposes of the Act and the Code.

On 5 December 2007, Crescent gave Abano a takeover notice under rule 41 of the Code of its intention to make a full takeover offer for 100% of the fully paid ordinary shares in Abano not already held or controlled by Crescent. The takeover offer document was dated 17 December 2007.

On 17 January 2008 Abano provided Crescent with an invoice which Abano said related to expenses incurred by Abano in relation to the takeover offer from Crescent and requested payment to be made to Abano pursuant to rule 49 of the Code. This invoice was for an aggregate amount of $490,095.07 (GST exclusive).

On 14 March 2008 Crescent's takeover offer lapsed.

On 14 March 2008 Abano provided Crescent with a second invoice which it said related to further expenses incurred by Abano in relation to the takeover offer from Crescent and requested payment to be made to Abano pursuant to rule 49 of the Code. This invoice was for an aggregate amount of $184,261.66 (GST exclusive).

Crescent paid to Abano $137,684.26 (GST exclusive) in respect of the two invoices. The balance, being $536,672.47 (GST exclusive), remained unpaid.

Due to the unpaid invoice balance on 9 April 2008 Abano withheld a dividend payable to Crescent of 13 cents per share. On 18 April 2008 Crescent commenced proceedings in the High Court to obtain payment of the dividend of $589,549.74.

In a statement released to the NZX on 24 April 2008 Abano said:

"Crescent Capital Partners has not reimbursed Abano for expenses incurred by Abano in connection with Crescent's failed takeover offer.

The Takeovers Code imposes an obligation on Crescent to reimburse Abano for its expenses in these circumstances. Despite repeated requests for payment, approximately 80% of Abano's takeover costs remain outstanding, some costs since January 2008. 

Accordingly, to protect the interests of its shareholders and in an attempt to bring this matter to resolution, Abano withheld from Crescent the 13c per share dividend recently paid by Abano to shareholders, and applied this amount towards payment of the outstanding expenses. 

As evidence of good faith, and on a without prejudice basis, Abano has arranged for $100,000 of the outstanding sum of $603,202 to be placed in a separate bank account should there be any bona fide dispute. 

Crescent has now issued legal proceedings against Abano for payment of the dividend. If this action proceeds, Abano will commence its own legal proceedings for recovery of the outstanding takeover expenses 

Abano intends to approach the Takeovers Panel formally, to request the Panel consider the issues relating to Abano's takeover costs with a view to ruling as to Crescent's non-compliance with its obligations to pay the costs, under the Takeovers Code. Abano has previously approached Crescent and continues to seek Crescent's co-operation in resolving the matter in this forum which Abano considers likely to be more time and cost-efficient for all parties...".

Request for meeting

By letter dated 7 May 2008 Abano, through its lawyers Harmos Horton Lusk ("HHL") made a formal request to the Panel to convene a meeting, pursuant to its powers in section 32 of the Act, to consider Crescent's compliance with rule 49(2) of the Code. Included with this letter was a summary of facts and submissions on behalf of Abano.

The basis of Abano's request was that Crescent had not paid to Abano in full the expenses invoiced by Abano to Crescent. In making this request HHL said:

"Abano's request for the Panel's assistance is not in the nature of requesting assistance with debt collection, but rather it is intended that the outcome of any Panel meeting clarify the meaning and scope of Rule 49(2)."

By making a request under section 35(3) of the Act, Abano had the right to make an application to the Court if the Panel did not, within 14 days after receiving the request, make a determination under section 32(3) of the Act.

The Panel retained Mr Brendan Brown QC to give it advice on legal matters.

Panel considered two aspects

Upon receiving Abano's request the Panel had to consider:

1. did it have jurisdiction?

2. may there have been a breach of the Code by Crescent?

Jurisdiction

Rule 49 of the Code states:

"(1) Despite anything in the constitution of the target company, each director of the target company is entitled to have refunded to the director by the target company any expenses properly incurred by the director on behalf, and in the interests, of holders of equity securities of the target company in relation to an offer or a takeover notice. 

(2) The target company may recover from the offeror, as a debt due to the target company, any expenses properly incurred by the target company in relation to an offer or a takeover notice, whether as a result of refunds made under subclause (1) or otherwise."

Non-payment by the offeror of expenses properly incurred by the target company and for which the target company seeks payment may amount to non-compliance with the Code.

Bell Gully for Crescent disputed that the Panel had jurisdiction to determine a complaint under rule 49(2), because (i) disputes about the extent and payment of debts created by rule 49(2) do not concern compliance with the Code so as to fall within section 32 of the Act, (ii) the Panel's procedures were not suited to the resolution of a commercial dispute of this type and (iii) the Panel's powers under sections 32 and 33 of the Act do not allow it to grant any remedy that is effective to resolve a commercial dispute about the extent of a debt.

HHL for Abano were of the view that the Panel had jurisdiction to determine a complaint under rule 49(2). HHL submitted that the relevant functions of the Panel were stated in section 8(1)(d) and (e) of the Act being (i) to investigate any act or omission or practice for the purpose of exercising its powers and functions under Part III of the Act; and (ii) to make determinations and orders and make applications to the Court in accordance with Part III of the Act. HHL submitted that section 32 was merely a vehicle that empowered the Panel to exercise its discretion in deciding to hold a meeting to make a determination in compliance with the Code, and that it may then be for the Courts to consider any enforcement action arising from the proper application of rule 49(2). In HHL's view it was appropriate for the Panel to exercise its discretion and hold a meeting pursuant to section 32 because (i) the Panel is the specialist regulator established to undertake the functions set out in section 8 of the Act, (ii) the interpretation of rule 49(2) can be a contentious issue with the potential to be problematic in a number of takeover situations and it was desirable for the Panel to make a determination on the scope of rule 49(2), (iii) rule 49(2), in substance, is no different to other provisions of the Code, in respect of which the Panel can and/or has called a section 32 meeting, and (iv) Abano's submissions of 7 May 2008 provided sufficient information to enable the Panel to be satisfied that Crescent "may not have acted/be acting in compliance with the Code" and that therefore the section 32 threshold was met. HHL submitted that Abano's application was not in the nature of a debt collection. Rather, Abano was seeking the Panel's assistance in determining the scope of "properly incurred" for the purposes of rule 49(2).

One of the core functions of the Panel is to enforce compliance with the Code and in the Panel's view this includes compliance with rule 49(2) of the Code. Although the Panel cannot make any order for payment of outstanding expenses, a determination by the Panel that the expenses were properly incurred and payable could be used by the target company to pursue a compensatory order under section 33K of the Act in the Court.

The Panel was satisfied that it had jurisdiction over the matter and could hold a meeting for the purposes of determining whether to exercise its powers under section 32 of the Act, if it considered that Crescent may not have acted, may not be acting or may not intend to act, in compliance with rule 49(2) of the Code.

Application of the law

In general terms the Panel's view is that the principles put forward by the High Court inCanterbury Frozen Meat Company Ltd v Waitaki Farmers' Freezing Company Ltd [1972] NZLR 806 in considering the meaning of "properly incurred" expenses can be applied to rule 49(2). The Canterbury Frozen Meat decision was in respect of section 11(2) of the Companies Amendment Act 1963, which was similarly worded to rule 49(2) of the Code. Section 11(2) was superseded by rule 49(2).

The expenses scrutinised by the Court in that case were consistent with the corporate takeovers environment at that time and the facts of the case. Those expenses were relatively confined in nature and included a consideration of expenses incurred in relation to defensive tactics, described by the Court as actions resisting the takeover.

In the Panel's view, it is not correct to treat the expenses actually approved by the Court in the Canterbury Frozen Meat case as being exhaustive of what expenses might be properly incurred whether in 1972 or in the current takeovers environment. What is critical is the nature of the expense and whether it falls within the general category of expenses identified by the Court. In making such a determination, regard must be had to the legal and corporate environment in which takeovers occur. Since 1972, law and practice as it affects takeovers has undergone substantial change. The responsibilities, accountabilities and expectations to which target companies and their Boards are now subject in the face of a takeover offer, bear upon the actions they take and the expenses which they incur.

On this basis and after considering the nature of the unpaid expenses, the Panel came to the preliminary view at a meeting on 26 May 2008 that all or some of the expense amounts invoiced by Abano to Crescent and not paid by Crescent, may have represented expenses properly incurred by Abano that Crescent was obligated to pay to Abano under rule 49(2) of the Takeovers Code.

The Panel continued its consideration of this material at two further meetings. At a meeting on 30 May 2008, a further preliminary issue arose.

Second preliminary issue

At that meeting the Panel considered the implications of Crescent having filed an action in the High Court in respect of the non-payment of a dividend by Abano. The Panel had information, including public information that Abano was intending to counterclaim/offset expenses that it believed Crescent was required to pay to it under rule 49(2) of the Code. The Panel considered that it was inappropriate to convene a meeting under section 32 while the matter of the application of rule 49 was currently before the Court by way of the proceedings filed by Crescent in respect of the Abano dividend. The matter would effectively have been before two Tribunals at the same time.

Subsequently HHL provided to the Panel legal advice Abano had obtained from Mr David Bigio and Mr Alan Galbraith QC to the effect that there would be no question of abuse of process if the Panel proceeded to determine the rule 49 issue as the issue was not yet before the Court. The Panel asked HHL to confirm whether or not Abano intended to defend the proceeding commenced by Crescent in the High Court by way of a defence, set-off or counterclaim based on the outstanding takeover costs in dispute. HHL responded by informing the Panel that Abano was not required to file its opposition to Crescent's High Court dividend claim until the last week of July and no decision had been made in relation to any defence of the Crescent proceedings. On the basis of HHL's response the Panel was satisfied that if it convened a meeting the dispute would not be before two Tribunals at the same time.

Calling of Panel meeting

As a consequence the Panel decided at a meeting on 18 June 2008 that it could proceed to call a meeting under section 32 to determine the issue of whether Crescent may not have acted, or may not be acting or may not intend to act in compliance with the Code.

The Panel decided that if it was to reach this view it required further submissions from Abano on the application of rule 49. These submissions were requested on 18 June 2008 and were received by the Panel on Monday 23 June.

The Panel met later on Monday 23 June 2008 to consider the issues further. 

The Panel resolved:

"On or about 5 December 2007 Crescent (as an offeror), gave notice to Abano (as the target company), of its intention to make a takeover offer.

On or about 17 December 2007 Crescent made its takeover offer for Abano.

Under rule 49(2) of the Takeovers Code, the target company may recover from the offeror, as a debt due to the target company, any expenses properly incurred by the target company in relation to a takeover offer or a takeover notice.

On or about 17 January 2008, Abano invoiced Crescent for certain expenses incurred by Abano in relation to the takeover offer and takeover notice being those expenses set out in Invoice No. 20177.

On or about 14 March 2008, Abano invoiced Crescent for certain expenses incurred by Abano in relation to the takeover offer and takeover notice being those expenses set out in Invoice No. 20184.

Crescent paid some, but not all, of the expense amounts invoiced by Abano in relation to the takeover offer and takeover notice.

Abano then withheld from Crescent the 13 cents per share dividend payable by Abano to its shareholders and applied the sum withheld to payment of the expenses not paid by Crescent.

The Panel is of the view that all or some of the expense amounts invoiced by Abano to Crescent and not paid by Cresecent, may have represented expenses properly incurred by Abano that Crescent was obligated to pay to Abano under rule 49(2) of the Takeovers Code.

In the circumstances, the Panel considers that Crescent may not have acted or may not be acting or may intend not to act in compliance with the Code."

Following the meeting Abano's various submissions were provided to Crescent who was asked to provide submissions in response by Friday 27 June. No submissions were received from Crescent on the substantive issue. However, Crescent raised questions of conflict of interest and apparent bias concerning the participation of one Panel member in the meeting process because of that member's involvement in an unrelated takeover offer in which there may in future be a similar question as to properly incurred costs. The Panel considered Crescent's suggestion that the Panel member had a conflict of interest and apparent bias unmeritorious given that the Panel is a market-based regulator whose members are expected to be dealing in such issues on a day-to-day basis and whose familiarity with these issues is the reason for their appointment. However, so as to avoid there being further suggestion of conflict or of apparent bias, the Panel member stepped aside from being a member of the Panel to sit at the meeting.

The Meeting

Following indications earlier in the week of a possible settlement between the parties, the Panel was advised late on Friday 28 June that the parties had reached a settlement on the amount of costs that Abano would recover from Crescent under rule 49 of the Code. This involved Abano releasing the net balance of the dividend owed to Crescent. The parties asked the Panel to cancel the meeting scheduled for the following Monday. Crescent informed the Panel it did not wish to appear at any s32 hearing.

The Panel held a meeting on the morning of Monday 30 June 2008 and decided that whilst the question of compliance with rule 49(2) in this case was still at large, a pragmatic approach should be taken given the settlement, but it should continue with the section 32 meeting as planned in order to bring formal closure to the matter.

With the agreement of both parties the venue was changed from the Duxton Hotel to the offices of PricewaterhouseCoopers where the Panel had held a regular meeting.

The section 32 meeting was held and the Panel informed the parties of its view on the events leading up to the meeting. Submissions were received from both parties on costs.

No determination

The Panel convened the section 32 meeting because it considered that Crescent may not have complied with rule 49 of the Code.

Prior to the meeting Crescent and Abano reached a financial settlement and asked the Panel not to hold its meeting.

The financial settlement does not dispose of the issue of non-compliance with the Code. The Panel is still very interested in addressing issues over the application of rule 49. However, the Panel recognised the practical reality that neither Crescent nor Abano wished to commit any more resources to contesting compliance issues before the Panel. Without further detailed consideration of the facts of the case which would not be possible given the settlement between Abano and Crescent, the Panel was unable to properly determine the issue.

The Panel, therefore, makes no determination that it is either satisfied, or is not satisfied, that Crescent has complied with rule 49 of the Code in relation to the payment of expenses properly incurred by Abano in response to the takeover offer and takeover notice from Crescent.

Panel comments

The Panel, as the regulator responsible for enforcing the Code, considers that it has jurisdiction to enforce compliance with the Code, including compliance with rule 49(2). The Panel stands willing to exercise its jurisdiction in appropriate circumstances.

There is no determination made by the Panel on the substantive issue of compliance with rule 49(2) of the Code by Crescent. However, if the Panel has received a request from a party and has issued a notice to convene a meeting under section 32 of the Act on the grounds that a person may not have acted, may not be acting or may not intend to act, in compliance with the Code, the Panel will convene the meeting if appropriate grounds for the meeting still exist, notwithstanding that the parties may have reached a private settlement of the dispute leading to the meeting request.

Abano's decision not to pursue the matter, which had been presented by Abano to the Panel as a means of clarifying the meaning and scope of rule 49(2) and not as a debt collecting exercise, was unexpected.

The Panel has been put to significant expense by this process as the Panel acted on Abano's request for the convening of a section 32 meeting. The Panel engaged Mr Brendan Brown QC to advise on several matters leading up to the meeting and it was necessary for the Panel to hold a number of meetings to consider the various issues raised by the parties.

It is unfortunate that the opportunity for the Panel to provide guidance through the forum of this meeting has been lost, as the market has a keen desire to properly understand the meaning and scope of rule 49(2). To assist the market, the Panel intends to publish a guidance note on rule 49(2) in the near future in relation to its view of "properly incurred" expenses, and will be inviting market participants to provide their submissions on the draft guidance note.

Order for costs

As recorded above the Panel has made no determination under section 32(3) of the Act as to Crescent's compliance or non-compliance with the Code.

The Panel will make an order that Abano, as the party that requested the Panel to hold the meeting, pay all costs incurred by the Panel in holding the meeting as provided for under Regulation 5(2)(a) of the Takeovers (Fees) Regulations 2001. These costs include all the costs of the Panel in preparing for and leading up to the meeting.

DATED at Auckland this 11th day of July 2008

SIGNED for and on behalf of the Panel by the Chairperson

David Oliver Jones