Editor’s note: This is general educational information about schemes of arrangement involving New Zealand Code companies. It is not legal or investment advice and does not describe any current transaction. Everything below comes from the official guidance and rulebooks listed at the end.
Most large New Zealand takeovers do not happen under the Takeovers Code. They happen under Part 15 of the Companies Act 1993, in the High Court, on a shareholder vote. The Takeovers Panel treats that route as a legitimate one. Its published position is that schemes are a legitimate and valuable means of undertaking corporate transactions, including where they affect the voting rights of Code companies, and that carrying out a transaction under a Companies Act process rather than under the Code provides economically sensible commercial flexibility. The interesting question is not whether a scheme bypasses the Code. It is what replaces the Code’s protections when it does.
Two different machines for the same outcome
Under the Code, control is a threshold problem. The Takeovers Code governs transactions and events affecting the voting rights attached to shares in Code companies, which are New Zealand-registered companies listed on the NZX, or with 50 or more shareholders and 50 or more share parcels and at least medium-sized. Rule 6(1) is the fundamental rule: a person holding no voting rights, or less than 20 per cent, may not become the holder or controller of an increased percentage unless after the event that person and their associates hold in total not more than 20 per cent, and a person holding 20 per cent or more may not increase at all. Rule 7 provides the exceptions.
A scheme replaces that architecture with a court process. Schemes and amalgamations under Part 15 are statutory court-approved procedures that allow the reorganisation of the rights and obligations of shareholders and companies. The court is the primary regulator, because the court makes the orders that give effect to a scheme. Schemes must be approved by the court under section 236(1) of the Companies Act. The bidder is not creeping up a register. It is asking a judge to move everyone at once.
The NZX Listing Rules recognise the route directly. Rule 4.9.1(a) permits an issuer to issue equity securities in consideration of an offer made in accordance with the Takeovers Code or a scheme of arrangement under Part 15 of the Companies Act 1993, or under an overseas takeover regime NZX considers provides a similar or greater level of protection to recipients than the Code or Appendix 3. Scrip consideration in a scheme therefore needs no separate shareholder vote under Section 4 of the Rules, because the scheme vote has already happened.
Where the Panel gets its jurisdiction back
Sections 236A and 236B impose additional requirements on schemes that affect the voting rights of a Code company. Section 236A(5) defines that phrase as an arrangement or amalgamation that involves a change in the relative percentage of voting rights held or controlled by one or more shareholders. On its face any change at all meets the definition.
There is a narrow limit. The Panel’s guidance cites Re Tilt Renewables Limited [2020] NZHC 1398, where Tilt Renewables sought a pro-rata return of capital by cancellation of shares under a Part 15 scheme, and the relative voting control of shareholders did not change when control percentages were rounded to the eighth decimal point. The court decided that section 236A did not apply.
Where it does apply, three additional requirements attach. The Panel must be given notice of the application when it is filed, typically when orders for holding the shareholder meeting are sought. The scheme must be approved by shareholders by prescribed majorities. And either the applicant must have filed a No-objection Statement from the Panel, or the court must be satisfied that shareholders will not be adversely affected by the use of section 236(1) rather than the Code to effect the change.
The Panel’s primary function is deciding whether to issue that No-objection Statement under section 236A(2)(b)(ii). It may first issue a Letter of Intention before the first court hearing, which states that on the information presented the Panel intends to issue a No-objection Statement. The No-objection Statement itself is issued before the second hearing, at which final orders are sought. Neither is compulsory. The Panel is not required by the Companies Act to provide one, and an applicant is not required to apply for one.
The vote, and the classes that vote
Under section 236A(4), shareholders of a Code company may approve a scheme affecting voting control only by a resolution approved by a majority of 75 per cent or more of the votes of shareholders in each interest class entitled to vote and voting on the question, and by a simple majority of all eligible voting rights. Both limbs must be met.
The phrase doing the real work is “each interest class”. Interest classes are determined in accordance with Schedule 10 of the Companies Act as a starting point: shareholders whose rights are so dissimilar that they cannot sensibly consult together about a common interest are in different interest classes, shareholders whose rights are sufficiently similar that they can consult together are in the same class, and if the rights of different shareholders will be different under the proposed arrangement then those shareholders are in different classes. Common law applies on top. The Panel’s guidance notes that where the acquirer or an associate holds shares, that shareholder will likely have to vote in a separate interest class from the others.
Class composition therefore decides who holds a veto. The Panel expects the division of classes to be clearly disclosed in the Scheme Booklet with an explanation of why the divisions were drawn, and it has on several occasions considered novel interest class questions in advance of reviewing scheme documents.
What the court is actually deciding
The Panel’s guidance sets out the test as recently stated in Re Abano Healthcare Group Ltd. First, there has been compliance with the statutory provisions as to meetings, resolutions and the application to the court. Second, the scheme has been fairly put to the class or classes concerned, and any circulars give all the information reasonably necessary to enable recipients to judge and vote upon the proposals. Third, the class was fairly represented by those who attended the meeting and the statutory majority are acting bona fide and not coercing the minority to promote interests adverse to the class they purport to represent. Fourth, the arrangement was such that an intelligent and honest person of business, a member of the class concerned and acting in respect of their own interest, might reasonably approve it. On that fourth limb the court added that it is necessary to consider whether the arrangement is generally fair and equitable.
The Panel’s contribution is disclosure-focused. It reviews scheme documents to ensure appropriate information is placed before shareholders, that interest classes have been adequately identified and that other protections available to shareholders are appropriate, and it helps ensure that matters relevant to the court’s decision are brought to the court’s attention. Other than in exceptional cases the Panel will provide a No-objection Statement only for proposals accompanied by an independent adviser’s report, in most cases one similar to a rule 21 Code report on the merits, and the independent adviser must be approved by the Panel.
The Panel also polices deal protection. It flags a scheme implementation agreement that gives the bidder absolute exclusivity without the potential for superior offers to be considered, excessively high break fees, or naked no vote break fees payable simply because shareholders did not approve the transaction.
Analysis: what the scheme route trades away and what it buys
The Code and a scheme are not equivalents dressed differently. They allocate the decision to different people.
Under the Code the decision is individual. Each shareholder accepts or refuses an offer and a holder who reaches 90 per cent or more of the voting rights may compulsorily acquire the rest, or be required by remaining holders to buy them, under Part 7 of the Code. Under a scheme the decision is collective and binary: 75 per cent in each interest class plus a simple majority of all eligible voting rights, then a court order that binds everyone including those who voted against. That is why a scheme gives a bidder certainty of one hundred per cent ownership without running a Code offer to the 90 per cent threshold, and it is also why the safeguards migrate from the acceptance decision to the vote and to the composition of the classes that cast it.
The substitute protections are real but they are procedural rather than economic. The independent adviser’s report survives, since the Panel effectively requires a rule 21 equivalent. Disclosure survives, and the Panel reviews it. What changes is that a dissenting minority no longer has the option of simply declining. Its only remaining lever is objection to the court, and the Panel’s guidance is specific about the time needed for that: Code companies should allow at least five working days from announcement of the shareholder vote result for objections to final orders to be filed with the court, with a longer period likely for more complex transactions, because shorter periods are likely to unreasonably prejudice shareholders.
Two things about the Panel’s role deserve emphasis, because they are easy to over-read. A No-objection Statement is not an endorsement of price. The Panel issues one where it considers an appropriate balance has been struck between alignment of the scheme with what would be permitted under a Code offer and the inherent flexibility of schemes. And the Panel’s own overview of the Code states the principle plainly: neither the Panel nor the Code makes decisions about the merits of a transaction, because what may be a good outcome for one shareholder may not be good for another.
A careful reader of a scheme booklet should therefore go to the class table first, not the price. Find how many interest classes there are and why. Find whether the acquirer and its associates are in a separate class. Find whether an independent adviser’s report is present and who approved the adviser. Find the break fee and the exclusivity terms, and check them against the Panel’s stated concerns. Then look at whether a Letter of Intention or No-objection Statement was obtained, and if not, which of the two limbs of section 236A the applicant is relying on instead.
