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Minority buy-outs: proposed Companies Act changes

01 February 2008

The Companies Act (Minority Buy-out Rights) Amendment Bill 2007 proposes a range of amendments to the minority buy-out provisions of the Companies Act 1993. However, despite an extensive Law Commission review in 2001 and several years’ gestation since then, the proposed clarifications and amendments are extremely tame and, in some cases, unjustified.

There is some useful clarification, but by and large the proposals fail fully to relieve affected companies and dissenting shareholders from the significant time and expenditure commitments involved in applying the Act’s currently vague provisions.

Fortunately, the Bill is in its early stages yet; it has only just had its first reading and there is ample opportunity to make submissions to the Commerce Committee, by 29 February 2008. The Cabinet paper recommending the changes in fact envisages that a number of technical amendments may need to be considered at the select committee stage, so there should be some flexibility.

The minority buy-out provisions contained in sections 110 to 115 of the Companies Act 1993 entitle shareholders of a company who have unsuccessfully opposed certain types of fundamental change to the structure or operations of the company to have their shares purchased by the company at a “fair and reasonable” price. The ready exit regime that they provide is particularly attractive where the dissenting shareholder would not be able to sell for full value on the open market. As we argued in the NGC‑Infratil dispute, however, nor are they intended to protect a shareholder from the vagaries and incidences of participating as a shareholder in a company’s business or to guarantee a premium over market price.

In short, the dissenter who has voted against the particular special resolution can give notice to the company requiring it to purchase the dissenter’s shares. The company can agree to purchase, can apply to the High Court for an exempting order on certain limited grounds (including a “disproportionately damaging” or “just and equitable” ground), or can arrange for the offending resolution to be rescinded. In most instances, the company will have no option but to agree to the purchase. The board then has to give the dissenting shareholder notice of the “fair and reasonable price” at which it will purchase its shares. The shareholder can object to the board’s nominated price and, absent agreement, the dispute will be determined by arbitration. In our experience, the combination of a legal arbitral process, the time involved, the money involved and the fact that all the while, the company’s market value and hence the appropriate “fair and reasonable price” for the shares are changing almost daily as business goes on, results in a very uncertain and costly process for all involved.

To simplify and clarify the regime, the Bill proposes that the minority buy-out provisions have the following key features:

  • an obligation on the company to send to each shareholder of the company a statement setting out the rights of shareholders when a special resolution triggers the minority buy-out provisions in the Act
  • the share offer for a minority buy-out must be accompanied by a statement outlining for the dissenting shareholder how an “honest estimate of the value” for the shares was determined – replacing the existing “fair and reasonable” criterion
  • the valuation of the shares in a minority buy-out should be calculated as at the value on the date the company gives notice to the shareholder agreeing to buy the shares – eliminating the current uncertainty as to the date as at which the valuation should be conducted, and disentitling the dissenter to the benefit/detriment of supervening events
  • the valuation should exclude any change in value attributable to the event decided by the special resolution (the triggering event) except when, as part of an amalgamation, the dissenting shareholder is being eliminated as a shareholder against the shareholder’s will. For example, if the company’s share price rocketed in response to the major business transaction that was the subject of the special resolution, the dissenter should not get the benefit of that
  • the shares should be valued on a pro rata basis to all shares of the class of which they form part
  • if the shareholder and company cannot come to an agreement on the value of the shares, the price may be determined by arbitration
  • legal title to the shares and voting rights attaching to them should remain with the shareholder until the price is ascertained and paid in full, but from the time of the provisional payment any purported disposition of the shares by the shareholder, except in favour of the company, will be of no effect.

There are three key issues with the proposed changes (as well as a number of ancillary or more technical issues which are not detailed here).

First, the central issue of valuation will likely remain as subjective and vexed as it is under the present “fair and reasonable” formulation. Quite how does an “honest estimate of value” provide any greater guidance? Honesty or dishonesty aside, the key question of the correct valuation approach still remains. We have already suggested to the MED that a clearer test would be “the objective money value of the shares” – or similar terminology – denoting a reference to the shares’ market price if ascertainable (which would follow the line of overseas judicial authority applying similar provisions) and, if not, then by reference to the price at which willing but not anxious parties would transact.

Secondly, the whole issue of the appropriate adjudicator in the dispute has been less than satisfactorily tested. Share valuation is the domain of experts, not arbitrators. The Bill should, in our view, follow the Takeovers Code’s reliance on expert determinations of value. As a related point, the new power given to the arbitrator to award damages for loss appears ill-founded, when the core issue is a price determination, and interest provisions apply. There seems almost to be some underlying assumption that the board will be inclined to misapply the provisions.

Thirdly, the Bill’s provision (adopting the Law Commission’s recommendation) that title to the shares remains with the dissenter until the price is finally ascertained and paid is unfortunate. Effectively reversing the High Court’s decision in NGC Holdings Limited v Infratil 1998 Limited, this means that although the value of the dissenter’s shares is determined as at the date on which the company gives notice agreeing to purchase, the dissenter then retains the shares and all rights to dividends, voting and other benefits – having indicated it is exiting as at that prior date. Conceptually, this must be flawed. The company is expected to part, provisionally, with possibly tens of millions of dollars, but receive no shares in return nor have its interest in the shares acknowledged. Only a statutory prohibition on disposal is proposed. However, this is vague and potentially open to abuse, leaving the dissenter free to deal with the shares in a manner short of alienation of legal or beneficial ownership.

A range of other lesser issues could be raised in submissions on the Bill. If submissions are given serious consideration, however, the result could eventually be a significant improvement to the minority buy-out regime.

Footnotes

  1. The provisions can be triggered by a special resolution that (i) alters the company’s constitution such as to impose or remove a restriction on the company’s activities, (ii) approves a major transaction, or (iii) approves an amalgamation proposal. For example, in the first significant instance of the provisions’ application, Infratil opposed NGC Holdings’ acquisition of a majority stake in electricity company TransAlta.
  2. See Rules 57 and 58.
  3. [2000] 3 NZLR 727

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