Chapman Tripp partners Alister McDonald and Pheroze Jagose recently acted for David Rankin, one of the combatants in the first-ever High Court scrutiny of a contested takeover. The three resulting judgments in Takeovers Panel v Delegat’s Wine Estate Limited & Oyster Bay Marlborough Vineyards Limited (Oyster Bay 1,2 & 3)1 provide important guidance in resolving Takeovers Code breaches, and the role of the High Court in doing so.
In this Counsel, we review the background to those judgments and comment on their implications.
The three judgments are the first by the High Court regarding alleged breaches of the Takeovers Code. In Oyster Bay 3 the Court effectively cancelled a successful takeover bid, requiring the process to start again, because of material problems with the information provided to shareholders by the target company on two competing takeover bids.
Competing bids for Oyster Bay
Oyster Bay Marlborough Vineyards Limited (Oyster Bay) was incorporated in 1999 to own and lease vineyards, with Delegat’s Wine Estate Limited (Delegat’s) as a principal shareholder. Delegat’s and Oyster Bay entered into a Long Term Co-operation Agreement, a Grape Purchase Agreement and a Vineyard Management Agreement (the Agreements). Oyster Bay has no employees and Delegat’s manages Oyster Bay’s day-to-day affairs.
After incorporation Oyster Bay offered 9 million shares at $2.00 to the public, to fund the purchase of two vineyards from Delegat’s parent. Delegat’s undertook to retain at least 20% of the shares in Oyster Bay for at least five years. Immediately prior to the takeover bids in 2005, Delegat’s held 32.58% of the shares. In 2002 Oyster Bay acquired another vineyard from Delegat’s, and leased a fourth.
The Oyster Bay Agreements are all long-term – running to between 2049 and 2067, after renewals. They include very limited rights of termination, and allow vineyards to be sold with Delegat’s consent, but subject to a purchaser accepting Delegat’s management and grapebuying rights. Oyster Bay, under any ownership, is most unlikely to be able to terminate the Agreements early.
Oyster Bay is listed on the NZAX and is subject to the Takeovers Code.
Despite the Agreements, Mr Peter Yealands, a Marlborough businessman with significant grapegrowing interests, saw Oyster Bay as an opportunity to increase his vineyard holdings. Peter Yealands Investments Limited (PYIL), a company formed for the purpose, became a substantial security holder in Oyster Bay, holding 6.71% of its shares immediately prior to making a partial takeover bid on 4 June 2005, for 51.1% of the shares. The initial offer price was $3.10.
Delegat’s immediately notified its intention to make its own partial bid, at $3.20. When its bid was formally made on 7 July it was for $3.35. The two competing parties then drove each other up in a series of steps, with both bids at $4.00 by the end of July.
Not surprisingly given its superior starting position, Delegat’s announced on 9 August that it had reached its takeover target – at that point it had acceptances that would take it to 51.66%. The Delegat’s offer remained open until 19 September, by which time it held acceptances for nearly 80% of shares – but with acceptances to be scaled back to reach the 50.1% for which it had bid.
Value of Oyster Bay
The independent directors of Oyster Bay complied with their obligation under the Code to provide a Target Company Statement (TCS) – for the PYIL bid on 17 June, and on 19 July for the Delegat’s bid. Both TCSs included an Independent Adviser’s Report, as required by the Code. The Reports were prepared by Ferrier Hodgson, Chartered Accountants, and both valued Oyster Bay at $2.39 to $3.15 on a discounted cashflow (DCF) basis, or $3.26 on a net tangible assets (NTA) basis.
The Reports recommended the DCF basis as the more appropriate, because it considered that the NTA value might not be achievable on a break-up. But in reality the NTA valuation was also income-based, relying on a property valuation conducted by Logan Stone valuers in 2004. Logan Stone had also adopted a DCF valuation approach, based on the prices paid by Delegat’s for grapes under the Agreements, to arrive at a valuation of $45 million for the land and improvements owned by Oyster Bay.
So neither the Logan Stone "land and improvements" valuation of $45 million, nor the Ferrier Hodgson NTA valuation based on it, reflected the value of Oyster Bay’s underlying vineyard assets. Evidence, later presented to the Panel and the Court but not provided to Ferrier Hodgson or included in its Reports, suggested that sales of comparable Marlborough vineyard land indicated that Oyster Bay’s landholdings could be worth $90 million, if able to be sold unencumbered – i.e. free of the long-term ties to Delegat’s. Before the Panel and the Court, the $45-million value was referred to as the "encumbered value", and the $90-million figure as the "unencumbered value".
Complaints to Takeovers Panel
After Delegat’s had reached its target, both Mr Yealands and Mr David Rankin (another substantial security holder in Oyster Bay) raised separate complaints with the Panel.
Mr Yealand’s initial complaint, made the day that Delegat’s declared success, alleged that the TCSs had not disclosed material information about the quality of and prices paid by Delegat’s for Oyster Bay’s grapes. (It had been acknowledged by Ferrier Hodgson that valuations were very sensitive to grape prices.) After investigation, the Panel decided not to take Mr Yealand’s complaint further, and he did not formally request that a meeting to consider his complaint be convened, under section 32 of the Takeovers Act. But grape prices did feature again later, before the Court.
Mr Rankin, a registered valuer, then complained to the Panel that the TCSs understated the potential NTA value of Oyster Bay, because they relied on the income-based valuation (encumbered), rather than the unencumbered value of about $90 million. Mr Yealands then lodged a related complaint, that the NTA valuation did not provide an independent appraisal of the vineyard assets, because it relied on the Logan Stone DCF-based valuation.
After investigations, summonsing of evidence from Oyster Bay (including Logan Stone valuations on both encumbered and unencumbered bases), and several meetings, including a section 32 meeting before the Panel at which all interested parties attended and made detailed submissions, the Panel resolved on 14 September that:
The [Delegat’s] target company statement did not include any reference to information about the market value, encumbered or unencumbered, of Oyster Bay’s freehold and leasehold vineyards. The Panel considers that this information, notwithstanding that such information would have had to have been very fully and carefully explained, may have constituted information about the assets and financial affairs of Oyster Bay that could reasonably have been expected to be material to the making of a decision by Oyster Bay’s shareholders to accept or reject the Delegat’s offer for the purposes of clauses 18(5) and 24 of Schedule 2 of the Code. As a consequence of the omission of this information from the target company statement the Panel considers Oyster Bay may not have acted or may not be acting in compliance with the Takeovers Code.2
Panel’s preferred outcome
The Panel then used its powers3 to put in place temporary restraining orders, while it sought to facilitate its preferred outcome – an appropriate corrective statement by Oyster Bay, followed by an opportunity to withdraw for shareholders who had accepted the Delegat’s offer.
The Panel’s approach is understandable, given the policy behind the Act. The Panel has been concerned to avoid the Code and Panel intervention becoming opportunities for tactical or defensive behaviours by takeover players. Later, during the litigation phase, the Panel expressed its approach as being consistent with its Australian counterpart’s approach, of doing (and, by inference, no more than) what was needed "to get the bid back on track" – to return the takeover market to where it was, before the relevant contravention. The Panel contended during the litigation that its preferred outcome was sufficient for what it saw as a material but not "fundamental" problem with the TCS.
Delegat’s and Panel go to Court – Oyster Bay 1
The Panel’s preferred outcome pleased no-one. The complainants saw the bidding process as fundamentally undermined by the information problem, and wanted bids cancelled and started again. Delegat’s declined to co-operate with the Panel, arguing that it had contractual obligations to accepting shareholders that it was bound to honour.
Delegat’s therefore commenced judicial review proceedings against the Panel on 4 October. Delegat’s argued that information on unencumbered values could not be material given the Agreements, and asserted that the Panel lacked jurisdiction to issue the restraining orders because:
- Delegat’s was an innocent third party to any contravention, and the Panel could not make orders affecting its rights; and
- the Panel was too late, because Delegat’s was contractually bound to complete its offer, and had become the beneficial owner of accepters’ shares (accepters then having only a right to payment), before the restraining orders issued.
In response, the Panel commenced its own proceeding on 6 October. It sought interim orders from the Court under section 37 to continue the interim orders it had made4; and final Court orders under sections 34 and 36, to implement the Panel’s preferred outcome.
Although both proceedings were firsts under the Takeovers Act, Delegat’s was the more novel. The Panel’s application is the route anticipated by the Takeovers Act, when problems with a takeover bid are not resolved before the Panel’s temporary restraining orders expire. Under section 35 of the Act either the Panel or any affected party may apply to the Court for orders, once the Panel has held that some party may not have complied with the Code. Delegat’s application for judicial review – effectively a pre-emptive strike – was probably driven by the desire to challenge the scope of the Panel’s (and the Court’s) jurisdiction, and the fact that application under section 35 requires the Panel’s consent, or a 10-day waiting period. It is unsurprising that the application did not succeed.
Delegat’s application and the Panel’s application for further interim orders were heard and determined by Justice Miller in the High Court at Wellington on 7 October.5
The Court came to a clear view that the encumbered and unencumbered value of the vineyards was information that could reasonably be expected to be material to shareholders.6 Justice Miller started from the position that the $45-million difference was value that had been captured by Delegat’s under the long-term agreements. He found force in the evidence of Greg Anderson, an economist engaged by Mr Rankin, that the discrepancy suggests that either the DCF model had been applied incorrectly, or that Delegat’s is paying less than market price for grapes. He found unlikely Oyster Bay’s contention that current high vineyard values were a temporary phenomenon induced by international beverage companies’ moves into wine-making. In any case, the Judge saw that as an issue to be evaluated by shareholders, not the Court.
The Judge’s conclusion did not depend on any different assessment on the unlikelihood of the Agreements being terminated. Rather, he reasoned that shareholders, faced with the information, could have been expected to reflect on whether any part of the unencumbered value would be likely to be available to them, if Delegat’s or alternatively PYIL gained control. He accepted as logical the Panel’s conclusion that it would not, under Delegat’s. But he found it impossible to conclude that there would be no opportunity for PYIL to extract value over time, e.g. by re-negotiation or strict enforcement of the Agreements. He accepted that as a matter of simple commercial reality it would be worth something to Delegat’s to secure a harmonious relationship with a newly independent Oyster Bay.
The Judge’s conclusion is logical and consistent with policy. The Takeovers Act includes objectives for the Code of efficient allocation of resources, encouraging competition for Code companies, fair treatment of shareholders, and allowing shareholders to ultimately decide, based on full information.7 Contrary to some market comment that the Panel’s intervention involved inappropriate speculation and reliance on implausible hypotheticals, the object of Panel and Court supervision should always be, as here, to ensure that shareholders are put in a position where they can make up their own minds. It of course remains to be seen whether arming shareholders with more information about vineyard values will lead to any different outcome on control – assuming a contested fight for Oyster Bay resumes.
The Court also rejected Delegat’s jurisdictional challenges. The Panel (and the Court) can, where necessary, make temporary restraining orders that affect the rights of "innocent" third parties – it is "only to be expected" that orders may have to affect parties who are not contravening the Code.8 And the Court’s superior jurisdiction to make orders under section 36 is not restricted to orders remedying breaches by the person who has failed to comply.9 Similarly, Justice Miller held that an order made by the Panel may take effect after an offeror has become contractually bound to acquire shares. And – as the result in this case has now demonstrated – the Court may make section 36 orders declaring agreements to acquire shares void or voidable. The Judge held that these powers were consistent with a legislative intention not to confine the Panel’s and the Court’s powers to where the offeror was not yet bound to purchase.10
The Court therefore dismissed Delegat’s application for review and continued the interim orders made by the Panel. The Court was not prepared, despite a Panel suggestion, to make final orders at this stage that would implement the Panel’s preferred outcome. Rather, it was now for any of the parties, including the Panel, to apply and argue for the final orders they considered necessary.
Oyster Bay 2 – further comments on the Court’s powers
Not surprisingly given the outcome of Oyster Bay 1, Oyster Bay and Delegat’s began co-operating with the Panel. The Panel agreed a proposed corrective statement with Oyster Bay and on 26 October applied to the Court for urgent consideration of further, final orders that would give effect to its preferred outcome.
The Panel’s application also sought to confirm that PYIL could not now bring up the grape price complaints that it had raised earlier but not pursued. The Panel argued that the scope of the Court proceeding was limited to the matters before the Panel.
PYIL and Mr Rankin continued to oppose the Panel’s preferred outcome. Each lodged papers with the Court signalling that they would seek orders that would cancel or avoid the existing Delegat’s offer and acceptances. PYIL also sought to put in issue its grape price complaint, and opposed the Panel’s application to deal with all matters summarily, before PYIL could get discovery of the Logan Stone valuations, and detailed grape price information. And on 1 November PYIL notified the market that it intended to make a new bid, at $4.50.
When the Panel’s application was heard on 9 November, it sought that, so long as PYIL undertook to make the foreshadowed bid, the period in which shareholders could reconsider their acceptances should be extended until a fortnight after the TCS for the new bid. Justice Miller identified that this might place shareholders in a "prisoner’s dilemma" – they might hope that enough other shareholders would withdraw their acceptances to make the Delegat’s bid fail - so they could then accept the $4.50 offer. But shareholders individually would have an incentive not to withdraw, to avoid ending up with no offer, should insufficient shareholders withdraw and the Delegat’s bid succeeded.
In any case, the Court was not prepared to decide the matter summarily. It accepted that the matter needed to be heard urgently, but held that PYIL was entitled to discovery, before an urgent hearing on 28 November. Discovery was limited to the summary of grape price information sought by PYIL, plus the Logan Stone valuations for 2004 and 2005.
The valuation evidence was justified because it had emerged that Oyster Bay had received preliminary notice of updated valuations in July 2005 – prior to the TCS for the Delegat’s bid. It appeared that the valuations could put Oyster Bay’s value at $51.5 million, as opposed to $45 million. Although the Court was alive to the usefulness of the full valuation reports to a rival bidder, when the Code gives a bidder no entitlement to due diligence, his Honour concluded that there was a material issue of what valuations were available when the TCS was issued, and whether the TCS was deficient by their omission.
The Court commented further on its jurisdiction in takeover matters. Justice Miller noted that it is the Panel’s role to supervise takeovers, and its processes are expected to be speedy. Parliament has deliberately limited the opportunities for litigation gameplaying – aggrieved parties must always go to the Panel first, before they may apply to the Court to exercise its much wider remedial powers. And a complainant will have no right to go to the Court at all, where the Panel acts and is satisfied the Code is being complied with.11
But the Court rejected the argument that complainants are limited in Court to issues pursued before the Panel – the Court’s jurisdiction is not constrained by the Panel’s earlier enquiry under section 32.12
The Court held that a case brought in the High Court is not an appeal from a Panel decision, but rather requires the Court to decide whether it is satisfied on reasonable grounds that a person is not complying with the Code. This is a different, positive test to that which the Panel has to apply.
So, if a complainant can get to the High Court, they will have a full opportunity to raise any issue as to alleged non-compliance, and may get discovery. The Court will give respect to the recommendations of the Panel, but will ultimately make up its own mind. And discovery may have a significant impact on the final result – as turned out to be the case here.
Oyster Bay 3 – the Panel changes its stance
Discovery was provided to all parties (on confidential terms). The valuation evidence had an immediate impact. The valuations confirmed that as of 4 July 2005, Logan Stone’s income-based valuation came to $51.5 million and that this figure, if not the detailed valuations, was available before the TCS was issued.
Ferrier Hodgson, the independent adviser, advised Oyster Bay and the Panel that had it been aware of the higher valuation, it would have put the NTA value at $3.98 per share not $3.26. Ferrier Hodgson commented that while the offer might have been "fair and reasonable", at least once it increased to $4.00, statements in the TCS about shareholders being offered a premium were clearly incorrect.
The Panel concluded on this new information that the TCS was fundamentally flawed and beyond correction. It therefore advised the Court and parties on 17 November that, so long as PYIL continued to undertake to make its new offer, it would favour orders avoiding the acceptances of Delegat’s bid, so that bidding could recommence. It gave similar advice to the market, the next day.
Ultimately, the Court accepted the Panel’s new recommendation, and gave an order under section 36(1)(k) rendering the acceptances of the Delegat’s offer void and of no effect. At the conclusion of the hearing on 28 November, the Court held that both the failure to include information on the updated (2005) valuation in the TCS, and on the unencumbered value of Oyster Bay, were material breaches requiring remedy. The Court made no finding on the materiality of the grape price information.
The Court did not rush to make the order avoiding the acceptances. The Judge noted the range of remedies that were available to him – many of which proceed on the basis that contracts will remain in place. He accepted the importance of giving effect to the Code’s objectives when selecting the appropriate remedy, and the public interest in Code compliance (and therefore, in effective remedies). He identified a number of further factors to consider when evaluating the remedy – the seriousness of the breach, the reasons for it if these are clearly established, the impact of the breach on shareholders, whether the remedy will eliminate any possible unfair advantage gained, whether it is the offeror who is in breach or who is implicated in a breach, what alternative remedies are available, and what evidence the Court has of what will occur in the event of a given remedy.
On the facts before him, the Judge accepted that avoidance of the contract was necessary because the breach went to the heart of the Delegat’s offer, and the process was too flawed to be able to be rectified. But it is clear from the judgment that selection of remedies will remain highly fact-specific, with a preference for less intrusive remedies where these will fairly "get things back on track", and thereby promote the Code’s objectives.
Lessons for the future
Oyster Bay confirms that persistence can pay off. The Court proceedings in this case were not initiated by the Panel complainants (though the Court proceedings resulted directly from those complaints). But both made important contributions to the litigation that assisted in achieving the Court orders that they, not the Panel or Delegat’s, had originally favoured.
Going to Court in this case shifted the initiative in a fast-changing factual situation. Litigation moved the Panel from decision-maker to being one of several litigants (although a respected and influential litigant). It is worth remembering that if the Panel had remained in control of the process, a corrective statement would likely have been issued in early October, and given the overwhelming numbers the Delegat’s bid would no doubt have been confirmed shortly thereafter.
Overall, and despite the intrusive nature of what was eventually ordered, Oyster Bay remains consistent with doing only what is necessary to "get a bid (bids) back on track". What was necessary to achieve that turned out to be more than the Takeovers Panel had first estimated. But the Court will, like the Panel, continue to emphasise Code objectives, including efficiency, fairness and shareholder autonomy. And given that, unlike Oyster Bay, most matters that come before the Panel are "live", with bids still active and success undecided, it remains likely that most diversions from the track can and will be corrected by Panel intervention, without going to court.
But the gravity of the remedy required confirms that a case like Oyster Bay properly belongs before the High Court. Given that access to the courts remains controlled by the need for a Panel decision that there is, or appears to be, a problem, going to the High Court for a (probably very small) number of decisions remains preferable to the Australian regime – where the Australian Takeovers Panel has power to order cancellations and avoidance of contracts, and the court jurisdiction is expressly limited.
It remains likely that disputed takeovers will come before the courts only rarely – it has taken more than four years for the first case to get that far. But Oyster Bay provides a first example of when and how the courts may be required to intervene, to help achieve the policy outcomes envisaged for the Code.