Senior Business Reporter Simon Hartley talks with Chapman Tripp senior associate Joshua Pringle on the evolution of company takeovers.
Schemes of arrangement to buy out New Zealand companies may become more commonplace than the traditional, and sometimes hostile, takeover bids.
While schemes of arrangement could potentially elicit a better share price value for shareholders, with would-be buyers and boards negotiating more harmoniously, schemes have a lower threshold on voting rights and can force a "squeeze out'' of minority shareholders.
Under a scheme of arrangement, control can be wrested with just 75% of shareholders voting in favour of a offer.
Under the NZX's takeover code, a buyer triggering a takeover by surpassing a 20% stake may go on to try to acquire 90% of total shares on issue, which automatically triggers the purchase, or "mopping up'' of the remaining 10% of shares.
A stake of 10.1% or more, especially when held by just one entity, is sometimes referred to as a "blocking stake'', in that 90% ownership cannot be attained.
That was the case when Port Otago took a 15.8% blocking stake in competitor Lyttelton Port Company (LPC), which stopped a potential LPC sale. Port Otago subsequently made a killing on selling the shares.
Chapman Tripp senior associate Joshua Pringle said this week's announcement of advanced negotiations between NZX-listed Nuplex and private-equity controlled resins maker Allnex Belgium, for a full takeover of Nuplex by way of a scheme of arrangement, could signal a new trend in New Zealand deal making.
"Schemes have been rare in the New Zealand market and, anecdotally at least, continue to be regarded with suspicion by some public company directors and institutional shareholders,'' Mr Pringle said.
That was in sharp contrast to Australia, where a significant majority of significant takeovers were structured as schemes, he said.
As the pending Scott Technology and JBS transaction demonstrated, schemes allowed for creativity in structuring transactions which would otherwise be cumbersome, if not impossible, to implement, Mr Pringle said.
"The options afforded by schemes should be embraced,'' he said.
Briscoes' unsuccessful tilt for Kathmandu, Scott Technology's 50.1% buyout by Brazilian food giant JBS and this week's separate $941million bid for governance software provider Diligent and $1.04billion bid for resin maker Nuplex, all provide examples of the difference between takeovers and schemes of arrangement.
Mr Pringle said there were key practical differences between a takeover under the Takeovers Code and a takeover by means of a scheme of arrangement.
A buyout under the Takeover Code takeover could be done without the co-operation of the target company; known as a hostile takeover.
A scheme of arrangement means the buyer requires the target's active involvement, but that can be blocked by a hostile target board, or a target board with a preference for a Takeover Code offer.
While the Takeovers Code requires the buyer to gain 90% of voting rights, under a scheme a full takeover can be achieved by a shareholder vote supported by at least 75% of the votes of each interest class voting to approve the scheme and a simple majority (50% + 1) of all votes entitled to vote, "Takeovers effected under a scheme can be coupled with other transactions, such as capital-raisings, on an all-or-nothing basis,'' Mr Pringle said.
He said while under the Takeovers Code an entity holding 10.1% was an effective blocking stake, under the scheme of arrangement voting process "that [blocking stake] was not guaranteed.
"It would all depend on the voter turnout on the day,'' Mr Pringle said.
Briscoes' attempt to takeover Kathmandu did not gain shareholder support, and after launching the $362.2million cash and scrip bid, Briscoes only moved its stake from 19.9% to just under 23%.
Mr Pringle singled out the recent 50.1% stake gained in Scott Tech by JBS, which is subject to Overseas Investment Office approval.
He said JBS Australia would take a majority shareholding in Scott, but the scheme differed from a straight takeover in that it provided for JBS to acquire both existing shares from Scott shareholders, on a voluntary tender basis, plus new shares issued from Scott itself.
"The number of new shares was sufficient to raise JBS' shareholding to 50.1%,'' he said.
He noted existing shareholders also had an option of increasing their shareholding at the same offer, or placement price.
"Commercially, the structure of the transaction guaranteed to remaining minority shareholders a certain level of new capital injection into Scott,'' he said.
Scott may get as much as $45million investment from JBS.
He noted that the scheme also provided that JBS could have compulsorily acquired the remaining minority shares, but only if JBS had first reached the 90% shareholding threshold as a result of acquisition of shares pursuant to the scheme.
"This threshold, of course, mirrors the Takeover's Code threshold, and addresses one of the major objections to the use of schemes of arrangement - being the lower threshold for forcing a minority squeeze-out,'' Mr Pringle said.
While the Nuplex takeover proposal was still at an early stage, it appeared that if it proceeded, it would result in a full takeover, with existing shareholders exiting for cash.
The public announcement stated negotiations had been ongoing for some months and several earlier indicative offers were rejected by the Nuplex board.
"This illustrates the primary negotiating role that the scheme process gives to the target board,'' Mr Pringle said.
Although it was impossible to say with certainty, the case could be made that such a process of negotiation may have led to a better price for shareholders than a traditional Takeover Code offer, he said.
The Takeovers Panel now accepts the use of schemes involving Takeovers Code companies, even where the underlying transaction is "in substance'' a takeover that could have been structured as an ordinary offer under the Takeovers Code.
"Provided shareholders are supplied with information, such as independent adviser reports, equivalent to that required to be produced for a takeover, the panel will not seek to block the use of a scheme,'' Mr Pringle said.
The Scott scheme of arrangement enabled JBS to sidestep the usual code rule which would have required it to obtain majority control through acceptances of its offer.
Instead, the placement will take it to that level, he said.
Also, the Takeovers Code timetable rules would not have allowed for Overseas Investment Office approval until months after the offer closed, Mr Pringle said.
The panel's current attitude represents the latest (and probably final) evolution in its views.
Early uses of schemes and amalgamations, particularly Transpacific's 2006 takeover-by-amalgamation of Waste Management, led the panel to the view that they were being used to avoid the Takeovers Code.
Mr Pringle said with time and turnover of panel membership, this attitude had changed.
"Directors and advisers should not continue to regard the panel's historic hostility as a reason to disregard schemes,'' he said.
He expects many target boards will continue to view with concern schemes that appear motivated by a desire to achieve full privatisation at a threshold lower than the 90% voting control provided for under the Takeovers Code.
"We suggest that this concern, although legitimate, should not be used to preclude careful consideration of the benefits that schemes could have for target companies and their shareholders, particularly if a higher price is on offer from a scheme,'' Mr Pringle said.
