In the last few years, there has been increasing popularity in using court-ordered schemes of arrangements under Part 15 of the Companies Act 1993 to undertake transactions. Russell McVeagh is the market leader in this area, and has acted on a significant majority of all recent schemes of arrangement in New Zealand to effect a variety of transactions.
Of particular note is the increasing appetite for public company takeovers effected by way of schemes of arrangement, after the Companies Act was amended to provide for this. Schemes are also being harnessed to effect complex corporate restructuring (including the recent demerger of Trustpower), and other novel transaction structures.
This round-up discusses recent takeovers and restructurings given effect by scheme of arrangement. Russell McVeagh has also produced a short guide to schemes of arrangement in New Zealand.
In recent years, takeover schemes of arrangement were rare. A key reason for this was the negative attention of the Takeovers Panel, which was concerned that such schemes may be a method of avoiding responsibilities under the Takeovers Code, and made clear its intention to intervene in such schemes.
Reforms to the Companies Act enacted in 2014 have addressed these concerns. Section 236A of the Companies Act provides a clear role for the Panel in approving schemes of arrangement involving Code companies, and the Panel has formally accepted their legitimacy (going so far as to include checklists and templates for applications in its recent guidance).
Russell McVeagh has acted in both of the full takeover schemes carried out under the amended legislation. We anticipate that the popularity of takeovers by way of schemes of arrangement (as an alternative to the Code process) will continue to rise.
Nuplex Industries Limited (July 2016)
This scheme effected the acquisition of 100 percent of the shares in Nuplex by Allnex New Zealand Limited (Allnex), a New Zealand incorporated entity, which was formed for the purpose of the scheme and is wholly owned by Allnex Belgium SA/NV, an entity based in Belgium. Russell McVeagh acted for Allnex. The scheme is notable for being the first major public takeover by scheme under the new legislation.
The scheme is an example of a "transfer scheme" where the shares in the target company (in this case, Nuplex) are transferred to a bidder in exchange for target shareholders receiving consideration for those shares. The scheme was conditional on European anti-trust approval. The scheme allowed for over three months between the High Court granting final orders approving the scheme (22 July 2016) and the "end date" by which the scheme had to be implemented (once regulatory approvals were outlined). This demonstrates how court orders may be drafted with flexibility to ensure they fit within the implementation of the overall transaction.
Radius Properties Limited (February 2017)
Radius Properties Limited (Radius) is a property investment company established in 2004. It is an unlisted entity, but prior to the scheme was widely held, with approximately 750 shareholders.
Russell McVeagh acted for Radius in the scheme, which effected a total takeover of Radius by an existing shareholder (Montagu Investment Holdings Limited) through a "cancellation scheme", whereby all shares not owned by Montagu were cancelled (by way of a capital reduction), in exchange for a cancellation payment by Montagu. This differs from a "transfer scheme" (where Montagu would have acquired those other shareholders' shares).
Radius' successful application also demonstrates that schemes of arrangement are useful tools for mid-market and unlisted companies as well as for the largest companies or transactions. The cancellation also dealt with security interests attached to the shares that were held by the minority and cancelled.
Scott Technologies Limited (April 2016)
2016 also saw a scheme of arrangement effect a partial takeover of Scott Technologies (Scott) by JBS Australia (JBS), where JBS increased its shareholding of Scott to 50.1 percent. The scheme provided for JBS to acquire both existing shares from shareholders (who were able to voluntarily tender their shares, as well as acquire new shares themselves) and new shares from Scott itself.
Notably, the scheme was structured so as to mirror the Code requirements, providing that JBS could compulsorily acquire the shares of minority shareholders if it acquired enough shares to reach the 90 percent shareholding threshold. Given the recent acceptance of takeover schemes, this approach may not be necessary as a matter of balancing objections to their use in this context, but it does demonstrate the flexible nature of the orders that may be granted by the courts.
Schemes of arrangement are also useful tools to effect corporate restructuring. The nature of the High Court's broad powers, including the ability to make orders that contradict the company's constitution and provisions of the Companies Act, enable the implementation of complex schemes. Russell McVeagh acted for Trustpower in its demerger (having previously also acted for Telecom New Zealand on its demerger into the Spark and Chorus businesses).
Trustpower Limited (October 2016)
In 2016, Trustpower used a scheme of arrangement to undertake a demerger, under which its assets and liabilities were separated between two groups of companies (Bay Energy Limited (renamed Trustpower Ltd) and Tilt Renewables Ltd, and their respective subsidiaries), as part of a solvent liquidation of Trustpower. Shareholders received, by way of the in specie distribution in liquidation, one share in each of "new Trustpower" and Tilt Renewables for every "old Trustpower" share they held. The distribution under the liquidation meant that the distribution was not treated as a dividend for tax purposes.
The use of the scheme of arrangement in this scheme demonstrated the great breadth and flexibility of the Court's powers under Part 15 in a number of ways:
- Separating Trustpower in two was achieved using the Court's broad power to order the transfer of all of Trustpower's rights, liabilities and contracts. To do so, Trustpower made use of a less-commonly used aspect of Part 15 (section 237), which grants the Court a wide discretion to make "ancillary orders" relating to any part of the scheme. This scheme's wholesale transfer of rights, liabilities and contracts shows how the Court's broad Part 15 powers can be used to create and craft transactional efficiencies.
- Another notable feature of the scheme was its use of a solvent liquidation. In Trustpower, the Court used the "ancillary orders" provision discussed above to give directions to the liquidators that bound them to follow the scheme. The combined use of the liquidation provisions of the Companies Act within the context of the Part 15 application reveals the flexibility with which the Court's Part 15 powers may be brought to bear.
On 29 September 2016 (with the Application for Final Orders filed, and only one week before Trustpower was due to receive final orders), South Australia suffered a violent storm which caused a failure of the electricity transmission network and a state-wide power outage. As a result of the outage, the South Australian electricity market was temporarily suspended. Due to these events, which affected Trustpower's assets and operations in South Australia, Trustpower elected to "pause" the scheme in order to consider the impact and allow the market to settle. While the storm ultimately did not affect the scheme, it shows a (hopefully rare) instance of where the Court must consider whether a supervening event affecting the scheme after shareholder approval will require further steps.
Michael Hill International Limited (June 2016)
This scheme of arrangement effected a redomiciliation of the Michael Hill group, with an Australian company (MHI Australia) replacing Michael Hill International (MHI) as the group's parent company. The mechanics of the scheme involved a one-to-one trade of shares in MHI Australia for those in MHI (except those of one shareholder, which were acquired under a separate but contemporaneous transaction).
The scheme demonstrates how the Court's Part 15 powers may be used to efficiently deal with the distribution of shares to overseas shareholders. Shares held by certain overseas shareholders were to be sold (with the proceeds provided to the shareholders), to prevent any issues being caused by overseas regulations preventing the distribution of shares to shareholders in those jurisdictions. The Court (consistent with Australian case law) held that (despite the fact their rights would be treated differently under the scheme), such overseas shareholders do not need to vote separately on the scheme (as it would potentially give them a power to veto the entire scheme).
A Guide to Schemes of Arrangement in New Zealand
In addition to this update, we have produced a short guide to schemes of arrangement in New Zealand for your reference.
Please get in touch with one of our team if you would like to discuss schemes of arrangement and how we could help you or your clients further.