Takeovers Update: A foolproof scheme?

Our thinking
Takeovers Update: A foolproof scheme?

In February 2015, NZX/ASX listed Nuplex Industries announced that it had entered into an agreement to be taken over by Allnex Belgium by way of a scheme of arrangement. Nuplex shareholders approved the scheme on 7 July 2016. The last remaining condition to the scheme proceeding is European anti-trust approval. This is expected to be obtained in early August 2016, which would allow the scheme to be implemented and the takeover completed in mid to late August 2016.

The Nuplex/Allnex scheme is likely to be a watershed moment for public takeovers in New Zealand. While schemes are a popular and accepted takeover mechanism in Australia (with 40% of public takeovers in 2015 proceeding by way of scheme) and elsewhere, they fell out of favour in New Zealand for about a decade. We expect the Nuplex/Allnex scheme to signal the return of the takeover-by-scheme in New Zealand, given the various benefits of a scheme structure for certain transactions.

Why did schemes fall out of favour?

In 2005, SKY Network Television merged with Independent Newspapers by way of a scheme of arrangement. To ensure that the scheme did not contravene the New Zealand Takeovers Code, which prescribes and restricts the available mechanisms for any person to acquire more than 20% voting control of a company subject to the Code, the scheme provided for the cancellation of all of the voting rights in SKY and Independent Newspapers before they were bought by a special purpose vehicle. This allowed the scheme to proceed with the approval of 75% votes of relevant interest classes of shareholders of SKY and Independent Newspapers outside of the Code’s takeover rules.

In 2006, Transpacific Industries took over Waste Management by way of an amalgamation. An amalgamation is a cousin of a scheme of arrangement. It is a statutory mechanism that allows two (or more) New Zealand companies to merge and become a single company, provided that the merger is supported by a 75% majority vote of the shareholders of each merging company. Unlike a scheme, an amalgamation is not subject to Court oversight. Accordingly, by structuring the transaction as an amalgamation, Transpacific Industries was able to effect a takeover of Waste Management and only required a 75% majority of the votes cast by Waste Management shareholders on the approval resolution.

There was significant adverse response to these transactions, and criticism of the directors involved. A number of market participants were vocal in their view that the scheme and amalgamation structures used in these transactions were inappropriate. The fundamental concern was that these structures allowed the bidder to acquire full ownership of the target with only 75% shareholder support, rather than the 90% acceptance level required to trigger compulsory acquisition under the Code. The Takeovers Panel, the regulator responsible for takeovers of companies subject to the Code, agreed with these concerns.

In the face of regulatory opposition, and the potential reputational risks associated with proceeding with a takeover by way of scheme or amalgamation, directors of companies subject to the Code and their advisers shied away from those structures. Takeover offers under the Code became the preferred – and, for a period, the only – mechanism for taking over NZX listed companies.

A brave new world for schemes

In 2014, New Zealand law was changed to address the concerns of market participants and the Panel. The Panel was, in effect, given dual oversight together with the Court for schemes involving companies subject to the Code. In contrast, amalgamations, which are not subject to Court oversight, were banned for companies subject to the Code.

Under the new regime, the requirements for a scheme of arrangement involving a company subject to the Code are as follows:

  • The scheme must be approved a 75% majority of the votes of shareholders in each interest class who vote on the approval resolution.
  • The scheme must be approved by a simple majority of the votes of all shareholders. Note that, unlike Australia, there is no ‘headcount’ test. That is, there is no requirement for a scheme to be approved by a majority of shareholders by number.
  • Either:
    • the Court must be satisfied that shareholders will not be adversely affected by the use of a scheme rather than a Code transaction (e.g. a takeover offer) to effect the transaction; or
    • the Panel must have provided the Court with a ‘no objection’ letter, confirming that the Panel does not object to the scheme.

If the above requirements are satisfied and the Court sanctions the scheme, then the scheme is binding on all shareholders – including those who vote against it.

The Panel’s oversight of schemes: the ‘no objection’ letter

Although, as noted above, it is possible for the Court to sanction a scheme without a ‘no objection’ letter from the Panel, we believe that in practice the vast majority of scheme promoters will seek this confirmation (as the Panel is likely to intervene before the Court in a scheme where a ‘no objection’ letter is not sought and obtained).

The ‘no objection’ letter process effectively gives the Panel oversight over a scheme together with the Court. When considering an application for a letter of this nature, the primary question the Panel will consider is whether shareholders will be adversely affected by the transaction being implemented as a scheme rather than a takeover offer under the Code. Importantly, the Panel does not view the use of a scheme rather than a takeover offer as an adverse effect in itself.

The Panel expects early engagement with scheme promoters, including an opportunity to review scheme documents and supporting materials well before any initial application to the Court. As part of its review, the Panel will have regard to the Code’s disclosure requirements for a takeover offer and to the appropriate identification of interest classes of shareholders by the scheme promoter. The Panel has given guidance as to its expectations for the content of scheme documents, including a requirement for an independent expert’s report on the merits of the transaction.

Why use a scheme?

There are a number of key differences between a takeover structured as a scheme and a takeover implemented as a full offer under the Code. Depending on the circumstances of any particular transaction, these differences may afford a bidder with a number of significant legal and tactical benefits.

Scheme Takeover Offer
Control of the process – and target involvement

While the bidder may initiate the transaction proposal, the target controls the process – subject to any contractual restrictions agreed with the bidder.

In particular, it is the target which applies to the Court for orders to sanction the scheme and the target which is primarily responsible for preparing the scheme documentation that is sent to target shareholders.

The bidder controls the transaction and the process.

The legal requirements for target involvement are limited to simply preparing the prescribed response documentation (the target company statement) and obtaining an independent expert’s report.

However, bidders seeking due diligence access, a board recommendation or other deal protection (such as exclusivity or break fees) will need to proactively engage with the target board.

Flexibility Significant flexibility to structure a transaction creatively to achieve legal and commercial objectives. Limited flexibility. The Code prescribes strict rules for takeover process and, in some cases, takeover terms. For example, the Code’s equal treatment rule requires an offer to be made on the same terms and provide the same consideration for all securities of the same class.
All or nothing? Yes. If the conditions to the scheme are satisfied and the scheme is approved by shareholders by the required majorities, the scheme will be implemented and bind all shareholders. It is possible to structure a takeover offer as an all or nothing transaction by including a 90% minimum acceptance condition. However, the bidder has the option of including a minimum acceptance condition at a lower threshold (for a full offer, this must be for at least a majority of the shares). This provides the opportunity for a transaction that results in a bidder achieving between 50% and 90% ownership.
Requirements for full ownership

The scheme must be approved a 75% majority of the votes of shareholders in each interest class who vote on the approval resolution.

The scheme must also be approved by a simple majority of the votes of all shareholders.

The Court has the discretion to apply additional voting requirements.

The bidder may trigger compulsory acquisition of the remaining shares in the target if the bidder achieves 90% voting control of the target.
Deal protection from shareholders

While not tested, we believe the bidder should be able to obtain voting undertakings from shareholders for up to 20% of the shares in the target.

It is possible that non contractual public statements of voting intention may also be enforceable by the Panel under the Code’s truth in takeover provisions.

In Australia, it is common for call options to be used as deal protection in schemes. This could also be used in New Zealand (for up to 20% of the shares in the target).

Possible to obtain lock up agreements, under which a shareholder agrees to accept the offer, for up to 100% of the shares in the target.
Deal protection from the target Suite of deal protections available, if agreed by the target board, including exclusivity (no-shop, no-talk, no-due diligence, matching rights, etc) and break fees. Suite of deal protections available, if agreed by the target board, including exclusivity (no-shop, no-talk, no-due diligence, matching rights, etc) and break fees.
Time frame for regulatory consents etc Significant flexibility to accommodate timelines involved in obtaining regulatory and other consents, including any required OIO consents (which may take several months, particularly if sensitive land is involved). In general, any regulatory consents must be obtained within 120 days after the offer is made. This can present a challenge for OIO consents, which can take several months when sensitive land is involved.

The New Zealand problem with schemes: is it solved now?

There has been a sea change since the regulatory and market opposition to the SKY/Independent News and Transpacific Industries/Waste Management transactions.

Following the legislative changes which afforded the Panel a degree of oversight over schemes involving companies subject to the Code, the Panel has confirmed that it views schemes as a legitimate and valuable means for undertaking corporate transactions in New Zealand which provide economically sensible commercial flexibility. In addition, the ‘no objection’ letter process provides scheme promoters with early engagement with the Panel and the opportunity to obtain a high degree of comfort that a takeover structured as a scheme will not face regulatory opposition from the Panel.

Similarly, the structure of the Nuplex/Allnex transaction, which is the first takeover-by-scheme under the new scheme rules, has not attracted significant criticism or adverse commentary from market participants. This is likely to provide directors of companies subject to the Code and their advisers with some confidence that the perceived reputational issues associated with schemes may be a thing of the past.

In light of the above, we expect to see the increased use of schemes in New Zealand as a takeover structure, particularly for private equity and other bidders where the ‘all or nothing’ certainty of schemes is necessary for financing purposes. That said, target boards which are considering agreeing to a scheme will need to ensure that they are satisfied on price, process and contestability (or other counterfactuals/value maximising options) before blessing one bidder as an anointed suitor. As a result, we expect that some target boards will continue to view schemes with a degree of suspicion, and may continue to favour takeover offers as a transaction structure – particularly where there is a concern about pricing or where there is a real likelihood of competing offers.

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