The Commerce Committee has examined the Companies (Minority Buy-out Rights) Amendment Bill and recommends that it be passed with the amendments shown.
Introduction
This bill amends the Companies Act 1993 to clarify and improve the existing minority buy-out regime. The bill provides an exit regime for dissenting shareholders who oppose fundamental changes to the company’s structure–a special resolution. Once a special resolution has been made and the dissenting shareholder has made a request for the company to purchase its shares, the bill provides guidance on determining an appropriate price for those shares.
The majority of submissions on the bill were supportive of its general intent of clarifying the minority buy-out regime.
This commentary focuses on the major issues we examined and the amendments recommended. We also recommend some amendments to clarify the intent of the bill, and other minor changes, which are not discussed.
Share valuation methodology
We recommend retaining the requirement for a company to use a “fair and reasonable” valuation method for determining the price it is willing to pay for shares. We consider this test is well established and requires an objective assessment of value.
The minority buy-out provisions of the Companies Act 1993 require that a company adopt a “fair and reasonable” valuation method, which will result in a “fair and reasonable” price, when determining the price it is willing to pay for the shares. After Justice Doogue’s criticism in Natural Gas Corporation Holdings Ltd v Infratil 1998 Ltd 1 that the existing regime was lacking in information for shareholders, particularly as to the valuation method and date, a review was undertaken of the regime. This resulted in proposed new section 112(2) (clause 7), which specifies that the company must adopt an “honest estimate” approach when applying the valuation method.
We agree with those submitters who opposed this approach because it involves a subjective assessment of value, and provides no judicial guidance as to its meaning so the valuation method is not clear.
Date of valuation
We recommend amending proposed new section 112(2) (clause 7) to provide that the value of the shares being purchased by a company be determined at the close of business on the day before the day on which the resolution was passed. As introduced, proposed new section 112(2) provides for valuation on the date the board gives notice to the minority shareholder agreeing to purchase the shares. The problems with this valuation date are that it would require both the shareholder and the company to anticipate events, and that it could result in different shareholders having different valuation dates.
Exception to valuation methodology
Proposed new section 112(3) (clause 7) of the bill as introduced provides an exception to the default valuation method in new section 112(2) only when a special resolution relates to a potential amalgamation. We recommend broadening this exception to allow the use of a different method whenever the default valuation method would be “clearly unfair” to either the shareholder or the company.
Arbitration determinations in cases of objection
Proposed new section 112A (clause 7) of the bill as introduced allows a price to be determined through arbitration if the shareholder and the company cannot come to an agreement on the purchase price.
We recommend that proposed new section 112A(6) be amended to ensure that the provisions of the Arbitration Act 1996 are applied when a matter is referred to arbitration. We further recommend amending proposed new section 112A(1) to make it clear that either party could initiate arbitration, not just the company.
Some submitters were concerned that proposed new section 112A(4) allows the arbitrator to award a shareholder damages for any shortfall in the initial payment, whether or not the shortfall was foreseeable. We recommend deleting “whether foreseeable or not”, as it is not appropriate for a person to be held liable for effects they could not foresee.
Interest awards
We agree with submitters who argued that proposed new section 112B(1) (clause 7), in prescribing the Judicature Act 1908 interest limits for any outstanding balance, does not allow market fluctuations in interest rates to be accounted for. We recommend amending proposed new section 112B(1) to delete the reference to the Judicature Act 1908 and to allow the arbitrator the discretion to award an appropriate interest rate.
Passing of legal and beneficial title
We recommend amending proposed new section 112C(1) (clause 7) to provide that legal title to shares passes to a company on notification of the company’s decision to purchase the shares. The reference to beneficial interest in the clause as introduced has been removed. This is consistent with common law, in that beneficial title in property passes at the time a contract for sale has been made. The arbitrator’s ability to award damages should provide the company with sufficient incentive to avoid delays in offering an adequate price.
As introduced, proposed new section 112C(1) provides for legal and beneficial title of the shares to remain with the shareholder until the price is ascertained and paid in full, to give the company an incentive to offer an adequate price and to prevent delays if valuation were to go to arbitration.
Legal title to the shares gives shareholders three rights: to vote on company decisions, to make distributions of the shares, and to receive distributions of the shares. It is inconsistent for the shareholder to retain these rights once they have elected to be bought out of the company.
Our proposed amendment to new section 112C(1) means that the restrictions on disposition of legal title to, or beneficial ownership of, shares contained in new section 112C(2) are no longer needed, and we recommend that these be removed.
Appendix
Committee process
The Companies (Minority Buy-out Rights) Amendment Bill was referred to the committee on 11 December 2007. The closing date for submissions was 29 February 2008. We received and considered five submissions from interested groups and individuals. We heard four submissions.
We received advice from the Ministry of Economic Development.
Committee membership
Gerry Brownlee (Chairperson)
Gordon Copeland (Deputy Chairperson)
Dave Hereora
Hon Darren Hughes (until 2 April 2008)
Hon Luamanuvao Winnie Laban
Simon Power
Hon Mita Ririnui (from 2 April 2008)
Hon Paul Swain
Lindsay Tisch
Dr Richard Worth
1Natural Gas Corporation Holdings Ltd v Infratil 1998 Ltd [2000] 3 NZLR 727, 728 (HC).
Commentary
Recommendation
The Commerce Committee has examined the Companies (Minority Buy-out Rights) Amendment Bill and recommends that it be passed with the amendments shown.
Introduction
This bill amends the Companies Act 1993 to clarify and improve the existing minority buy-out regime. The bill provides an exit regime for dissenting shareholders who oppose fundamental changes to the company’s structure–a special resolution. Once a special resolution has been made and the dissenting shareholder has made a request for the company to purchase its shares, the bill provides guidance on determining an appropriate price for those shares.
The majority of submissions on the bill were supportive of its general intent of clarifying the minority buy-out regime.
This commentary focuses on the major issues we examined and the amendments recommended. We also recommend some amendments to clarify the intent of the bill, and other minor changes, which are not discussed.
Share valuation methodology
We recommend retaining the requirement for a company to use a “fair and reasonable” valuation method for determining the price it is willing to pay for shares. We consider this test is well established and requires an objective assessment of value.
The minority buy-out provisions of the Companies Act 1993 require that a company adopt a “fair and reasonable” valuation method, which will result in a “fair and reasonable” price, when determining the price it is willing to pay for the shares. After Justice Doogue’s criticism in Natural Gas Corporation Holdings Ltd v Infratil 1998 Ltd 1 that the existing regime was lacking in information for shareholders, particularly as to the valuation method and date, a review was undertaken of the regime. This resulted in proposed new section 112(2) (clause 7), which specifies that the company must adopt an “honest estimate” approach when applying the valuation method.
We agree with those submitters who opposed this approach because it involves a subjective assessment of value, and provides no judicial guidance as to its meaning so the valuation method is not clear.
Date of valuation
We recommend amending proposed new section 112(2) (clause 7) to provide that the value of the shares being purchased by a company be determined at the close of business on the day before the day on which the resolution was passed. As introduced, proposed new section 112(2) provides for valuation on the date the board gives notice to the minority shareholder agreeing to purchase the shares. The problems with this valuation date are that it would require both the shareholder and the company to anticipate events, and that it could result in different shareholders having different valuation dates.
Exception to valuation methodology
Proposed new section 112(3) (clause 7) of the bill as introduced provides an exception to the default valuation method in new section 112(2) only when a special resolution relates to a potential amalgamation. We recommend broadening this exception to allow the use of a different method whenever the default valuation method would be “clearly unfair” to either the shareholder or the company.
Arbitration determinations in cases of objection
Proposed new section 112A (clause 7) of the bill as introduced allows a price to be determined through arbitration if the shareholder and the company cannot come to an agreement on the purchase price.
We recommend that proposed new section 112A(6) be amended to ensure that the provisions of the Arbitration Act 1996 are applied when a matter is referred to arbitration. We further recommend amending proposed new section 112A(1) to make it clear that either party could initiate arbitration, not just the company.
Some submitters were concerned that proposed new section 112A(4) allows the arbitrator to award a shareholder damages for any shortfall in the initial payment, whether or not the shortfall was foreseeable. We recommend deleting “whether foreseeable or not”, as it is not appropriate for a person to be held liable for effects they could not foresee.
Interest awards
We agree with submitters who argued that proposed new section 112B(1) (clause 7), in prescribing the Judicature Act 1908 interest limits for any outstanding balance, does not allow market fluctuations in interest rates to be accounted for. We recommend amending proposed new section 112B(1) to delete the reference to the Judicature Act 1908 and to allow the arbitrator the discretion to award an appropriate interest rate.
Passing of legal and beneficial title
We recommend amending proposed new section 112C(1) (clause 7) to provide that legal title to shares passes to a company on notification of the company’s decision to purchase the shares. The reference to beneficial interest in the clause as introduced has been removed. This is consistent with common law, in that beneficial title in property passes at the time a contract for sale has been made. The arbitrator’s ability to award damages should provide the company with sufficient incentive to avoid delays in offering an adequate price.
As introduced, proposed new section 112C(1) provides for legal and beneficial title of the shares to remain with the shareholder until the price is ascertained and paid in full, to give the company an incentive to offer an adequate price and to prevent delays if valuation were to go to arbitration.
Legal title to the shares gives shareholders three rights: to vote on company decisions, to make distributions of the shares, and to receive distributions of the shares. It is inconsistent for the shareholder to retain these rights once they have elected to be bought out of the company.
Our proposed amendment to new section 112C(1) means that the restrictions on disposition of legal title to, or beneficial ownership of, shares contained in new section 112C(2) are no longer needed, and we recommend that these be removed.
Appendix
Committee process
The Companies (Minority Buy-out Rights) Amendment Bill was referred to the committee on 11 December 2007. The closing date for submissions was 29 February 2008. We received and considered five submissions from interested groups and individuals. We heard four submissions.
We received advice from the Ministry of Economic Development.
Committee membership
Gerry Brownlee (Chairperson)
Gordon Copeland (Deputy Chairperson)
Dave Hereora
Hon Darren Hughes (until 2 April 2008)
Hon Luamanuvao Winnie Laban
Simon Power
Hon Mita Ririnui (from 2 April 2008)
Hon Paul Swain
Lindsay Tisch
Dr Richard Worth