Transactions

Statement of Reasons - Exemption Application by Vector Limited

Vector Limited ("Vector"), pursuant to section 23 of the Official Information Act 1982, requested a statement of reasons in respect of the Panel's decision to decline the recent exemption application made by Vector and The Australian Gas Light Company ("AGL").

The Panel's reasons for its decision to decline the exemption application from Vector are set out below.

Exemptions sought by Vector Limited and The Australian Gas Light Company

In this transaction Russell McVeagh's Auckland office acted for Vector and Russell McVeagh's Wellington office, acted for AGL. AGL were presented as the beneficiary of the exemptions sought.

On 11 October 2004 the Panel received an application from Vector, supported by AGL, seeking the following exemptions in respect of a transaction which would result in Vector becoming the holder or controller of at least 66.05% of the shares in NGC Holdings Limited ("NGC") a code company:

(1) an exemption from rule 6 of the Code to allow Vector to become the holder of more than 20% of the voting rights in NGC as the result of the acquisition of a New Zealand holding company of AGL on the condition that Vector also make a full takeover offer to remaining NGC holders; and

(2) an exemption from rule 8(2) to the extent that its takeover offer would be required to be made to the New Zealand holding company that Vector intends to purchase from AGL.

On 29 October 2004 the Panel declined the exemptions sought.

The applicants subsequently asked for the opportunity to be heard by the Panel in support of the application. The division met twice on 2 November 2004 to reconsider the matter. Representatives of AGL and Vector made submission at the first meeting. The Panel met again in the afternoon. The Panel confirmed its earlier decision to decline the exemption application.

Background to the application and information supplied by the applicant

AGL controls approximately 66.05% of the voting rights in NGC. AGL holds its interest in NGC through two New Zealand holding companies, AGL NZ Limited ("AGLNZ") which holds 64.25% of the issued shares in NGC and AGL NZ Investments Pty Limited ("AGL NZ Investments") which holds 1.81%.

On 26 August 2004 AGL announced that it intended to sell its interest in NGC and called for indicative bids from prospective purchasers. AGL required that the bids be in the form of bids for AGLNZ rather than directly for AGL's NGC shares.

On Sunday 10 October 2004 AGL entered into an agreement to sell all of the shares in AGLNZ to Vector. Once the sale of AGLNZ to Vector becomes unconditional Vector would become the controller of the 64.25% of voting rights in NGC held by AGLNZ. The sale and purchase agreement also provides for the sale of the NGC shares held by AGL NZ Investments.

The sale and purchase agreement is conditional on Vector:

• making an application for an exemption from certain provisions of the Code in respect of the acquisition of AGLNZ and AGL NZ Investments' NGC shares; and
• making a takeover offer for the remaining shares in NGC in accordance with the terms of such an exemption.

The sale and purchase agreement provides that if the Panel declines the exemption application AGL and Vector would negotiate in good faith and use their best endeavours to agree an alternative structure for the transaction that reflects a purchase price of $3.00 per NGC share (adjusted for any dividend payment).

In support of its application for an exemption from rule 6 of the Code AGL advised that it wished to dispose of its investment in NGC by selling at the holding company level because there is a significant advantage to AGL in structuring the sale in this manner. AGL advised that:

• AGL shareholders could obtain an $80m tax advantage if AGL sells its interest in NGC at the holding company level. If AGLNZ sold the NGC shares and wished to pass the proceeds to its shareholder (AGL) in the form of a dividend, New Zealand withholding tax would be payable by AGL amounting to approximately $80 million. No Australian tax credit for this would be available. If and when AGL on-distributed the dividend to its shareholders, those shareholders would be liable for tax on their dividends. The withholding tax would therefore be an absolute cost to AGL and its shareholders;
• In order to extract the proceeds which AGLNZ would receive from a sale of NGC shares into a takeover offer AGL would need to either liquidate AGLNZ and its subsidiaries or migrate the incorporation of these subsidiaries to Australia. AGL has stated that this is a protracted administrative process which would mean that the proceeds from the divestments would not be immediately available to the shareholders of AGL. There would be contingent tax liabilities involved as well.

AGL and Vector asserted that if circumstances arose which were substantially the same as those in which an exemption was previously granted by the Panel, that a similar exemption should be granted to them.

AGL and Vector asserted the circumstances of the proposed transaction were similar to the circumstances in which the Panel had granted an exemption to Origin Energy New Zealand Limited ("Origin") in respect of its acquisition of Edison Mission Energy's ("Edison") interest in Contact Energy Limited ("Contact"). AGL stated that it had the same motivation as Edison for wishing to structure the sale of its code company interest at the holding company level because if Edison had not been able to structure the sale of its interest in Contact at the holding company level it would have incurred a significant taxation liability. On this basis Vector and AGL argued that an exemption similar to that contained in the Takeovers Code (Origin Energy New Zealand Limited) Exemption Notice 2004 should be granted to Vector. The exemption application had been framed accordingly.

Panel's consideration of the exemption application

The Panel has the ability to grant exemptions under rule 45 of the Takeovers Act if it considers that such an exemption would be appropriate and consistent with the objectives of the Code. As a result of these legal constraints the Panel is a reluctant granter of exemptions and exemptions are only granted with considerable care. No two applications are the same and each exemption application is treated on its own facts and merits and is decided in a manner that would ensure that the policy and disciplines of the Code are observed.

The exemption sought by Vector and AGL concerned an upstream acquisition of voting rights in a code company. The Code was deliberately constructed to capture such acquisitions. Acquisition of interests at an upstream level is an internationally recognised Code avoidance structure. However, the Code does provide a mechanism, in rule 7(c), by which voting rights in code companies can be acquired by means of an acquisition of an upstream holding company. The requirement in rule 7(c) that non-associated shareholders of a code company approve such an acquisition allows those shareholders to decide for themselves the merits of such a transaction.

Under the Code if a bidder does not wish to utilise rule 7(c) to acquire voting rights it can make a full takeover offer for all of the shares of the code company. Such offers must, under rule 20, be made on the same terms and provide the same consideration to all holders of securities in the same class. This requirement promotes the equal treatment of all shareholders of a code company.

Vector proposed to acquire voting rights in a code company by means of the purchase of an upstream company but did not wish to utilise any of the mechanisms available under the Code. In order for such an exemption to be granted the Panel would need to be satisfied that there were compelling reasons, consistent with the objectives of the Code, as to why the proposed transaction should not be structured in a manner that would comply with the Code.

The Panel noted that the main reason that AGL and Vector wished to structure the transaction as a sale of the holding company was to benefit the shareholders of AGL by enabling it to avoid a possible New Zealand taxation liability of $80 million.

Vector and AGL sought to demonstrate that although its proposed transaction would not comply with the Code, NGC shareholders would be offered the same consideration per share under a takeover offer as AGL would be receiving in respect of its interest in NGC under the sale and purchase agreement. However, they acknowledged to the Panel that AGL would receive a further benefit through savings on tax that was not available to other shareholders. This reflected the fact that the offer to remaining NGC shareholders would be made on different terms to AGL. The Panel was concerned that in the circumstances it would not be possible for it to satisfy itself that the proposed exemptions complied with the principles of rule 20, a fundamental tenet of the Code.

The Panel noted that indicative bids for the sale of AGL's interest in NGC had been requested on the basis that AGL would be able, as a result of an exemption from the Code, to avoid a possible significant New Zealand taxation liability. The price for a share in NGC itself was not tested in a competitive process.

As Vector and AGL had submitted that the circumstances of its proposed transaction were very similar to those regarding the Origin/Edison transaction, the Panel reviewed the reasons why it had granted an exemption in respect of that transaction.

When Origin and Edison applied to the Panel for an exemption from the fundamental rule they advised the Panel that structuring the transaction as a takeover offer which the holding company would accept was not practical and/or cost effective in the particular circumstances for two main reasons:

• Edison's Contact shareholding was financed partly by bank loans and partly by the issue of a substantial amount of redeemable preference shares by a New Zealand holding company. If Edison arranged to sell its Contact shareholding at the direct shareholder level this would be an event of default under the bank facilities and the terms of the redeemable preference shares which would have required immediate repayment of those debts. If bidders were unable to assume the existing debt, the transaction would be less attractive and the price obtained for Contact shares, and subsequently offered to remaining shareholders, could be lower; 
• if Edison arranged to sell its Contact shares at the direct holding level it would face substantial taxation liability in the United States of America. Edison's liability for United States tax would be significantly reduced if the sale occurred at a New Zealand holding company level.

In respect of its possible taxation liability Edison argued that an exemption would maintain a proper relation between the costs of compliance with the Code and the benefits resulting from it. Edison's argument was not based on the actual cost of complying with its provisions but the potential loss of benefits by structuring a transaction in a manner that complies with the Code.

The Panel considered that the potential loss of benefit that could otherwise be obtained by structuring a transaction in a manner that did not comply with the Code was not an appropriate ground for an exemption.

The focus of the Panel in respect of the Origin exemption was directed to the effect of alternative transaction structures on the shareholders of the target company. The Panel accepted the submissions of Edison and Origin that if it did not grant an exemption to Origin, there could be a negative pricing effect on all Contact shareholders because a sale at the direct holder level would have triggered repayment of banking and financing arrangements in the Edison group.

Panel's decision and reasons

The Panel noted that the transaction between AGL and Vector was structured in the way proposed in order to provide taxation benefits, commercial convenience and some cost savings to AGL and its shareholders. If the exemptions were not granted, the sale of the NGC shares would still be possible. The transaction may require restructuring and AGL and Vector may face increased costs. However, this was not a cost of compliance with the Code. It was a cost occasioned by other legal obligations.

The exemption sought could be looked at in two ways, either:

• it would have allowed a takeover offer to have been made by Vector to all shareholders of NGC with one shareholder, AGL, receiving an offer on different terms; or 
• it would have denied NGC minority shareholders the right, given to them by the Code, to approve or otherwise a very significant upstream acquisition of the controlling interest in the company by Vector.

The Panel considered that there was no compelling reason in the context of the particular circumstances of the proposed transaction to grant an exemption from the fundamental rule.

The Panel considered that its power to grant exemptions was not for the purposes of allowing a party to avoid the Code in order to provide itself with a commercial benefit, in this case a tax benefit to the selling party. The Panel noted that there were existing mechanisms under the Code (namely shareholder approval) that AGL could use to sell its holding in NGC at the holding company level. The Panel considered that granting the exemption sought was not an appropriate use of the Panel's statutory powers where the purpose of the exemption was to assist AGL in avoiding an $80million New Zealand tax liability which might otherwise be incurred by selling at the code company level as required by the Code. In these circumstances the Panel, considered that it would be inappropriate to grant the exemption sought and declined the application.

Material issues of fact

In making its decision the Panel considered the application made by the applicants to the Panel dated 11 October 2004 and a further submission from the applicants, dated 1 November 2004, in support of their request that the Panel reconsider its decision.

The Panel did not make any findings on material issues of fact.

18 November 2004