Transactions

BEFORE THE TAKEOVERS PANEL

Introduction

[1]  Blue Sky Meats (N.Z.) Limited ("BSM") is an unlisted meat processing company based in Invercargill. It was formed in 1986 to serve as an alternative processor in the South Island and its main activity is the processing of lamb, mutton, bobby calves and goats. A subsidiary of BSM, Blue Sky Marketing Limited ("Blue Sky Marketing"), is responsible for marketing finished product lines through a contractual arrangement with Horizon Meats New Zealand Limited ("Horizon") ("the Marketing Contract"). Horizon is the largest shareholder in BSM with a 37% holding.

[2] Lowe Corporation Limited ("Lowe") was formed in 1998 as a result of Lowe Walker Limited selling its meat processing arm to Richmond Limited. Lowe's main activities are processing and exporting cattle skins.

[3] Over the period from July 2002 until September 2002 various discussions and negotiations took place between Lowe, Horizon and BSM concerning a possible purchase by Lowe of BSM's business or the shares in BSM. Some of these discussions centred on the Marketing Contract, which had been entered into on 21 October 1995 (as a continuation of an agreement originally entered into some 10 years earlier) and had approximately 2 years to run, expiring on 31 December 2004. Under this agreement Horizon had sole and exclusive marketing rights for BSM product (although Horizon also marketed product from other sources).

[4] It was evident that in order for Lowe to make an offer for BSM it would be necessary for there to be a satisfactory agreement with Horizon for restructuring or terminating the Marketing Contract.

[5] The outcome of these discussions was that on 23 September 2002 Lowe and Horizon negotiated a "lock-up agreement", which included:

• an irrevocable and unconditional agreement by Horizon to accept a takeover offer that Lowe intended to make for all the shares in BSM in respect of Horizon's 2,709,594 shares in BSM (within two working days of receipt of the formal offer documents);
• an irrevocable offer by Horizon to BSM (that has not been accepted by BSM) to terminate the Marketing Contract on certain terms and conditions including payments totalling $2.7 million;
• a letter of comfort also dated 23 September 2002 from Lowe to Horizon that once its offer for BSM became unconditional it would procure acceptance of the contract termination offer.

[6] Clause 3(a) of the irrevocable offer to terminate the Marketing Contract, dated 23 September 2002, described the proposed $2.7 million consideration as comprising $2.4 million for early termination of the Marketing Contract and any rights Horizon has under it, and an additional $300,000 for the transfer to Blue Sky Marketing of the "Horizon" brand name and for certain packaging (both amounts being exclusive of GST).

[7] On 24 September 2002, Lowe gave notice of its intention to make a full takeover offer for all the shares in BSM for a consideration of $4.50 per share. The offer was to be conditional on Lowe receiving acceptances taking Lowe's voting rights to at least 90% of the voting rights in BSM (although this condition could be waived by Lowe, subject to the minimum acceptance condition of more than 50% required by the Code), together with various other conditions. Clause 10 of the disclosure schedule to the notice of takeover (Arrangements between Offeror and Target Company) included the following disclosure:

As a condition of giving the Takeover Notice, Horizon Meats New Zealand Limited has irrevocably offered to restructure or terminate the current marketing contract between Blue Sky Marketing Limited, Blue Sky Meats, Horizon Meats New Zealand Limited and others, which offer would apply if the Offeror achieves acceptances for shares which take its voting rights to more than 90% of the voting rights in Blue Sky Meats.

[8] In early October, BSM issued a "don't sell" notice to its shareholders. Mr Barry Thomas, Chairman of BSM, advised Lowe that BSM did not intend to sign Horizon's irrevocable offer to terminate the Marketing Contract.

[9] On 9 October 2002 Lowe distributed the offer document to BSM shareholders. In contrast to the takeover notice submitted earlier, the appendix to the offer document included a new paragraph in clause 16 ("No Escalation Clause") which stated: 

Horizon Meats New Zealand has irrevocably agreed that, if the offer becomes unconditional, it will terminate the current marketing agreement between Blue Sky Marketing Limited, Blue Sky Meats, Horizon Meats New Zealand Limited and others dated 21 October 1995, and to transfer to Blue Sky Marketing Limited exclusive ownership of and right, title and interest in the brand name "Horizon" and all trade marks, insignia, designs and logos associated with that brand name, for an aggregate payment of $2.7 million to be made by Blue Sky Marketing Limited, and to certain other consequential matters.

[10] The target company statement from BSM which was accompanied by the independent adviser's report from Polson Higgs & Co, Chartered Accountants ("Polson"), was distributed to shareholders of BSM on 23 October 2002. Both documents referred to the provisions for termination of the Marketing Contract.

[11] At paragraphs 5.2 and 7.6 of the independent adviser's report Polson stated:

5.2 The Horizon Lock-up Agreement

BSM has been advised by Horizon and Lowe that, if the takeover offer becomes unconditional, they will terminate the current marketing contract between Blue Sky Marketing Limited, Blue Sky Meats, Horizon Meats Limited and others dated 21 October 1995 and transfer to Blue Sky Marketing Limited exclusive ownership of and right, title and interest in the brand name Horizon and all trade marks, insignia, designs, logos associated with that brand name, for an aggregate payment of $2.7M to be made by Blue Sky Marketing Limited.

The payment to be made to Horizon was arrived at by negotiations between Horizon and Lowe. The Directors of BSM have advised that they have not been a party to these negotiations or to any element of this transaction.

The Directors of Horizon have advised the payment of $2.7M is to compensate Horizon for loss of profits, termination costs and any other costs that may be incurred, as well as to purchase all intellectual property associated with the brands.

In our view it is not unreasonable to expect a payment to be made to Horizon to buy out this contract. However we do not have access to any further information to verify this and therefore we cannot make any determination as to whether $2.7M is a fair value for this transaction.

7.6 The Horizon Lock-up Agreement

Lowe and Horizon have agreed that the current marketing contract (refer section 5 of this Report) will be terminated if the offer becomes unconditional with a payment made to Horizon of $2.7M. Horizon is a 37% shareholder in BSM. Rule 20 of the Takeovers Code stipulates that "An offer must be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer".

The Directors of BSM have advised us that they have not been a party to the negotiations in respect to this transaction.

We have stated (refer section 5) that we consider a payment to Horizon for buying out this contract would seem not unreasonable.
However, we do not have sufficient information to determine if the quantum is fair.

The effect of any overcompensation for terminating this contract could result in additional consideration being received by Horizon.
Notwithstanding this, the offer for the shares to Horizon and all other shareholders is the same, ie $4.50, and considered by us to be fair.

[12] The recommendations of the directors of BSM to the shareholders of the company were set out at paragraph 15 of the target company statement and included:

The Directors are also concerned that if the percentage level of acceptance for shares is reduced from 90% (see paragraph 4.1 Lowe Corporation Offer) to a figure of more than 50% then:

• Shareholders should be mindful that those shareholders who do not accept and remain as shareholders will pay (as shareholders of the Company), for the termination of the Marketing Contract at a value negotiated by Lowe Corporation and Horizon (see page 25[5] Independent Advisor Report Polson Higgs October 2002). 

"However we do not have access to any further information to verify this and we therefore cannot make any determination as to whether $2.7 million is a fair value for this transaction."

• One shareholder (Horizon) may receive additional consideration for its shares which is different to the other shareholders (see page 39 [7.6] Independent Advisor Report Polson Higgs October 2002). 

"The effect of any over compensation for termination this contract could result in additional consideration being received by Horizon". 

[13] These statements left open the question whether in these circumstances one shareholder (Horizon) may be in a position to receive additional consideration for its shares not available to other offerees in breach of rule 20 of the Code. (Rule 20 states that "An offer must be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer".)

[14] The Panel is very concerned that Polson did not make an assessment of the proposed payment of $2.7 million to Horizon. The Panel had drawn this matter to the attention of Polson and also to the directors of BSM by letters on 17 October 2002 and 18 October 2002. In the Panel's view it is part of the independent adviser's role to make such an assessment. It is apparent from evidence received at the hearing that Polson could have done so. The Panel is also of the view that the directors of BSM had a responsibility to see that the issue was properly addressed.

[15] In the absence of any determination by the independent adviser as to whether the $2.7 million represented fair value for the termination of the Marketing Contract it became necessary for the Panel to consider whether there may be issues under rule 20 of the Code arising from the payments to be made to Horizon for termination of the Marketing Contract.

[16] The Panel held a preliminary meeting on Friday 25 October 2002 to discuss these aspects of the offer. The Panel agreed to appoint senior legal counsel and to obtain advice from an expert in business valuations. The Panel agreed to meet again the following Tuesday (after Labour weekend).

[17] The Panel met on Tuesday 29 October 2002. Participating in that meeting were Mr Peter McKenzie QC, of Wellington, counsel assisting the Panel, and Mr David Underwood, FCA, of Wellington, a specialist business adviser.

[18] The Panel, acting on advice, considered that Lowe may not have acted, may not be acting, or may intend not to act in compliance with the Code in respect of its offer for BSM. The Panel decided to convene a meeting under section 32 of the Act for 9.30 a.m. on 4 November 2002 to determine whether it should exercise its powers under the Takeovers Act 1993. The Panel issued an interim restraining order restraining Lowe from taking any action that was or that might reasonably be expected to constitute a contravention of the Code and directing Lowe to refrain from taking any action in respect of its offer including processing any acceptances that it received in respect of its offer from the time of receipt of the notice.

[19] The Panel issued summonses to Lowe, Horizon and BSM to produce all relevant information and documents to the Panel, and to be represented by their proper officers at the Panel's meeting on 4 November 2002. They were also asked to provide written submissions to the Panel by 9.00 a.m. on Friday 1 November 2002.

The issue for determination

[20]  The issue to be determined by the Panel was whether Lowe had acted, was acting, or was intending to act in compliance with rule 20 of the Code by undertaking that, in the event of its offer becoming unconditional Lowe, would procure the payment to Horizon by BSM of the sum of $2.7 million as compensation for termination of the Marketing Contract.

Relevant rule of the Code

[21] Rule 20 provides that: 

Same terms and consideration-

An offer must be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer.

[22] The Code does not prohibit collateral arrangements being entered into during the pre-bid period. Any such arrangements must, however, be disclosed in the takeover offer document.

[23] This freedom to enter into such pre-bid arrangements does not affect rule 20 which is a fundamental requirement of the Code and requires that the same consideration (i.e. the same price) must be offered to all holders of the same class of securities.

[24] Consequently in the present case the Panel is required to be satisfied that no part of the sum of $2.7 million agreed to be paid as compensation for termination of the Marketing Contract represented in substance the payment of additional consideration to Horizon for its shares.

Parties' Submissions and Evidence

[25] Written submissions on the issue were received (and exchanged between the parties before the hearing) from Lowe and Horizon. BSM provided documents relevant to the issue, but did not provide written submissions.

[26] At the hearing the Panel received evidence from Mr M McMillan and Mr G Cooney of BSM, from Mr J Upton and Mr G Graham of Horizon and from Mr K Smith and Mr P Ryan of Lowe. The Panel also heard submissions from Mr W Cambridge for BSM, Mr K Toogood QC for Horizon and Mr R Wallis for Lowe.

[27] The Panel considered the evidence and submissions and took advice on valuation issues from Mr Underwood, expert adviser to the Panel.

Determination

After examining the relevant documents produced by the parties, hearing the submissions and evidence, and considering the advice from its own expert adviser, the Panel determines that the consideration offered for the termination of the Marketing Contract in connection with the proposed transaction did not contain additional consideration to Horizon for the purchase of its shares. The Panel is satisfied that the same consideration is being provided for all securities that are the subject of the takeover offer. Accordingly the Panel is satisfied that Lowe has acted in compliance with Rule 20 of the Code.

[28] The Panel's interim restraining orders will expire at 5.00 p.m. today in accordance with their terms.

DATED at Auckland this 6th day of November 2002

SIGNED for and on behalf of the Panel by the Acting Chairperson

J C KING