Companies (Minority Buy-out Rights) Amendment Bill

I move, That the House take note of the Commerce Committee’s report on the Companies (Minority Buy-out Rights) Amendment Bill and that the bill be now read a second time. The objective of the Companies (Minority Buy-out Rights) Amendment Bill is to make technical amendments to the minority buy-out provisions in the Companies Act 1993 to ensure that they function efficiently, cost-effectively, and appropriately. The minority buy-out provisions provide an exit regime for shareholders of companies who have unsuccessfully opposed certain types of fundamental changes to the structure or operations of the company by virtue of a special resolution. The regime then entitles them to have their shares purchased by the company at an appraised price.

The rationale behind these provisions is that if the company’s structure or operations change significantly after the shareholder enters the company, the shareholder should be entitled to decide to exit the company but also be afforded some specific protection against financial loss by reason of the decision to leave the company. The provisions have been amended largely in accordance with the recommendations made in the Law Commission report on minority buy-outs.

The Law Commission commenced a review of the minority buy-out provisions after Justice Doogue criticised the provisions in Natural Gas Corporation Holdings Ltd v Infratil 1998 Ltd, stating that the existing regime was lacking in information for shareholders, particularly as to valuation, method, and date. This bill addresses those concerns. Since the first reading of the bill the Commerce Committee has recommended a number of amendments to strengthen the bill, which, I am sure, will help it achieve its objectives.

I conclude by thanking the officials, and members of the Commerce Committee, for their work in considering the bill, and acknowledging the contributions of those who provided submissions on the bill. I commend the bill to the House.

The Companies (Minority Buy-out Rights) Amendment Bill is one of those interesting bills on which, when they come before the Commerce Committee, there is genuine interest on the part of all members to ensure that we get good and workable legislation. In this case we are talking about the rights of individuals who purchase interests in various entities, only to find that a bigger parcel of shares than theirs is taken up by someone else, or that there is a proposal to buy out those individuals by someone else, not always at a price that might be in the best interests of those individuals. It is not uncommon for a price to be struck for a buy-out that is ahead of the market, but not necessarily ahead of the expectations of some of the smaller shareholders in the particular company. As the Minister said, when people make a decision that a new arrangement inside a company they had previously been confident about investing in comes to the fore, then people should a right to exit—indeed, to test the strength of whoever has bought the company and of the new philosophy that may, presumably, come with that.

The committee has made a number of recommendations for amendments to the bill, and we will discuss those further in the Committee stage. The bill is fairly technical in nature, but, as everyone knows, it is the fine print that always ends up costing us. So if we were to typify this bill, we would typify it as being a bill that puts some rules around the effect of the fine print.

One of the things that we are a little uncertain about is the involvement of the Arbitration Act, or bringing in the Arbitration Act as the vehicle for sorting out disputes between, I guess, an offered value and the value that someone would like for their shares. Those sorts of provisions can be very costly, and it is a little unclear exactly who would meet the costs of that arbitration process. I do not believe that is specified in the bill, so the Minister may wish to take us through that when we go through the Committee stage. That may be an oversight. If in fact there is a right to arbitration and a right to a price that reflects the best value of those shares, I think the question should be asked and answered in the bill as to how the cost of dealing with the arbitration is to be met, because it can be quite expensive.

The provision of interest on, I guess, unpaid moneys owing after a price is struck is a very positive contribution in this bill, and, once again, that matter is covered in a new clause in the bill. We will discuss that further during the Committee stage, so that the Hansard record is clear about what the select committee believed it was doing as this law was being put into place.

We also recommended amending new section 112C, inserted by clause 7 of the bill, to provide that legal title to shares passes to a company on notification of the company’s decision to purchase the shares. The relevance of that is that if in fact a board accepts a proposal, and the purchaser indicates that it has accepted it, the potential exists for it to be quite some time before a settlement is reached—or is concluded, which is perhaps a better way to describe it. None the less, to all intents and purposes the owner of those shares, once this bill is passed, will in fact be the purchasing entity.

It has been a very interesting exercise to consider all the various contortions of minority buy-out rights inside competition law, and I think this bill goes a very long way towards trying to make clear some of the things that have been matters of confusion for players in the commercial world. We look forward to the coming debate in the Committee stage. The bill is relatively short, but it is very, very important. As I said before, most people find that the devil is in the detail, and that it is the fine print that trips us up. So we expect that the Committee stage today will traverse all aspects of the provisions of the bill, in order to ensure it is abundantly clear exactly what it is all about. It is interesting, though, that the bill is in only two parts, and we do notice over a period of time that when important bills are debated just part by part, there is not a lot of time to consider all of the clauses in them.

However, I am sure that by the end of the day this bill will probably be law or, I should say, ready for the Royal assent. Subject to being satisfied with the answers to our questions in the Committee stage, I say we will continue to support the bill.

On one view of it, the Companies (Minority Buy-out Rights) Amendment Bill might not be considered interesting, but it affects a very substantive change to the law. All tributes go to the honourable Minister, Lianne Dalziel, who at all times has kept an open mind on the merit of this legislation, and who has been prepared to make change where there was a warrant for doing that.

These changes being made by this legislation are to the Companies Act 1993, which of course is a code that deals with a whole lot of aspects of corporate activity in New Zealand. The Act constitutes a code, if you like, for those activities that are very much at the heartland of New Zealand business. The provisions relating to minority buy-out rights are contained in sections 110 to 115, so the provisions are not very extensive but they raise essential issues of equity. The argument is really simple: if the goalposts are moved, despite the shareholder’s opposition, he or she is entitled to decide that he or she no longer wishes to be a player, and to also be protected from losing financially by reason of a decision to leave the field. I think it is worthwhile citing a comment made by Alexander Khutorsky, who is well known in this area of corporate law, for what he said about the intended functioning of buy-out provisions. In a merger context he said this: “In theory the existence of appraisal statutes has a two-pronged effect on merger transactions. First, the appraisal remedy is supposed to guarantee that dissenting shareholders get a fair price for their equity stakes. This prong of the appraisal statute is embodied by a procedural scheme whose end result is a judicial valuation of the minority stake in the target, with attendant money damages where appropriate. Perhaps more important than the actual exercise of the remedy is the ex ante effect which the mere existence of the remedy is supposed to produce. This second prong works by inhibiting the incentives of majority owners to act strategically by providing for the possibility of a threat of litigation and uncertain damages awards. The corporate planner’s assumed preference for certainty, coupled with potential cash-flow constraints in meeting potentially sizeable judicial awards, should encourage the planner-majority owner to offer fair consideration in freeze-out transactions.” That is quite turgidly but thoughtfully worded. It is a simple enough concept: a person is a shareholder in a company, the other shareholders do something that the person does not like, so what are the rights of that person? So we see in this bill the setting up of a code—the amendments to and filling out of provisions in the existing law—that gives rights to the shareholder who wants to get out. In money terms, that is the way in which those rights have been exercised.

There is a history in all of this, of course, and in fact it is quite a long history. But what prompted the Government to move—actually, to move quite slowly—was a case called Natural Gas Corporation Holdings Limited v Infratil 1998 Ltd. The judge in that case, which is a trigger for all these changes being made today as this bill progresses, started off by saying “To the best of the knowledge of the parties, this is the first time that the minority buy-out rights sections have come before the court.”, and “It is common ground that the minority buy-out rights sections are defective. Although they provide for the company to nominate a fair and reasonable price for the shares to be acquired, they do not state at what date that price is to be ascertained. Nor do the sections make any provision for the company, in nominating the fair and reasonable price, to give any information to the minority shareholder of the basis of the valuation. Nor do the sections provide any mechanism for the completion of transactions falling within them. As already noted, s 112(4) is silent as to the basis upon which the shares at issue are to be dealt with and the time when the company is required to pay the provisional price. Nor has the arbitrator power to make orders in respect of the completion of the transaction following the arbitration. Having created minority buy-out rights, the Act fails to provide for important features of the transactions that can arise under them. In the context of the Act as a whole and its history, that is understandable. However, here there is a relatively substantial sum of money involved. In other cases there could be a substantial number of shareholders involved. While the Law Commission and the legislature may have been wise to avoid the complexity of some of the North American legislation, it would seem essential that, if the minority buy-out rights sections are to be effective, they should be urgently reconsidered.”

Against the background of those comments, the Law Commission looked at this issue. It came up with a report; it suggested draft legislation. Parliamentary Counsel had a look at that legislation, and made some changes. The Commerce Committee made some further changes. But these are the sorts of issues that arise: should notice be given of the availability of the buy-out rights, along with notice of the special resolution sought to be passed? Should the company be required to give particulars of the basis on which its offer is being calculated? Should the statute specify the date at which the shares are to be valued, or otherwise dictate the basis of valuation? Should the shareholder be required to convey title to the shares—Mr Brownlee alluded to this issue—at the same time that the shareholder has paid the price calculated by the company on the basis of the value as initially assessed by it? Should the legislation spell out broader powers that authorise the arbitrator to award compensation for costs and delay? And should the arbitrator have the power to make ancillary enforcement orders? This legislation that is before us today actually covers all those points.

In the time I have remaining, it is interesting for me to look briefly around the world to see how other countries, and other jurisdictions, have dealt with this issue. Delaware, in the United States, which I guess would be recognised as the state in the United States that has the most company registrations—more companies in the Fortune 500 are registered in Delaware than elsewhere—has I think pioneered standards of excellence in corporate governance and has specific provisions dealing with this. I will not go through those provisions, but they talk about that need to establish a fair value for the existing shareholder. When we come to the Committee stage we will see that is not quite the way that New Zealand has approached the issue, and it certainly was not the way that the approach was to be taken when the bill was introduced. In New York, where they have similar provisions in the New York Business Corporation Law, section 623—as the Minister reminded me last night—they use this concept of “fair value”, the same as in Delaware. In Canada they talk about “fair value” in the context of the compensation award.

The American Business Association has a model code where “fair value” is actually defined. We have not done it in that way. I think we have done it in a much more sophisticated way. But in the American Business Association model “fair value” means the value of the corporation shares determined in three circumstances. First, immediately before the effectuation of the corporate action to which the shareholder objects; second, using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal; and, third—and this is quite significant—without discounting for lack of market ability or minority status, except in certain cases.

I commend this legislation as it has come back from the Commerce Committee with a number of changes that we are later to consider. Looking at section 110 of the Companies Act, and the sections that follow it, I think we have produced an outcome in a New Zealand context that is highly workable.

Mr Assistant Speaker, yes—

💬 Gerry Brownlee: He was no help at all.

Well, that is a bit uncharitable from that member, and he is getting me to engage with him when my speech must not be longer than 1 minute. I have already spent probably about 15 seconds.

💬 Gerry Brownlee: No, he was no help at all—

I think that is a bit uncharitable from that member; in fact, I have defended his contribution on many occasions. By and large the Commerce Committee has worked well. I congratulate Dave Hereora. He was the one who spent a lot of time getting his head round the Companies (Minority Buy-out Rights) Amendment Bill. I am obliged to the previous speaker, Dr Richard Worth, who does know a bit about it. When he gives little sermons in the House like the one he has just given, I always find them particularly interesting, especially when he goes back into history.

💬 Gerry Brownlee: I bet sometimes you wonder why you slept through it.

No, to be fair to the member, I did not sleep through the speech he just gave; I found it very, very interesting. But I am now off the point. There is the potential to go on for 10 minutes if—

💬 Gerry Brownlee: Could have fooled me.

Normally I love interjections because they give me something to draw on, but I do want to make a couple of quick contributions. As the member Richard Worth quite rightly said, this bill came from some recommendations from the Law Commission around a case involving Natural Gas Corporation Holdings. It was about trying to set a regime so that shareholders had better rights. It is interesting to know that when I was the Minister of Commerce the first thing we did was to introduce the Takeovers Code, which the National Party had basically rejected. That code, of course, gave important rights to small shareholders. It is really important that we are introducing this legislation, which is another leg of this particular important part of companies law.

As has already been said, we know what the objective is: to ensure that the markets function properly. It is time to give minority shareholders not so much protections as special abilities to have a fair share value price if they oppose certain transactions of the company—that is, if the company is no longer the company that they had shares in. For example, if the constitution of the company is amended, that amendment might imply restrictions on the company’s activity; the company might approve a major transaction that a shareholder does not agree with; or it might improve an amalgamation that the shareholder does not agree with. The shareholder may disagree with what is being done and want to opt out. This bill makes sure that there is a proper process for, particularly, assessing the value of the company shares at the time, so that minority shareholders’ rights are protected as best as they can be.

This is good legislation. It is another piece of legislation from the Commerce Committee. I almost said the committee is ably chaired by the chairman; he does chair it quite well, but he made some uncharitable comments about me, so I will not say it. What I will say is that this is good legislation and needs to be progressed.

From the comments made by previous speakers, members will be aware that National is supporting the Companies (Minority Buy-out Rights) Amendment Bill. The genesis of the bill came out of a case back in 2000, and a review of the law following the Hon Justice Doogue criticising the existing law in the case Natural Gas Corporation Holdings Ltd v Infratil 1998 Ltd. His criticisms related to the lack of information available to shareholders in relation to the valuation of shares and the date at which shares were to be valued. That case was really the genesis of a review that then led to a Law Commission report back in 2001.

At the time of that case the judge said the matter was urgent—that it needed urgent action. And here we are with this bill 8 years later, which shows how urgent it has been to this Government.

💬 Hon Lianne Dalziel: There was a Law Commission report in the meantime.

The Law Commission report was in 2001. Well, I say to the Minister that in the court case—and she will have a chance in the Committee stage to be able to articulate the points that she wishes to make—the judge said the “fair and reasonable” test for the valuation of shares is well established. It is an objective test. There is no accumulated jurisprudence in relation to the “honest estimate”, and it would be a subjective test. One of the questions that came out from submitters to the Commerce Committee was, what actually is the “honest estimate” test?

The key points that were canvassed at the select committee included the issue of valuation. Gerry Brownlee raised the point that where shareholders are aggrieved at the company’s choice of valuation method, would they retain the right to reject a price offer and to bring the matter to arbitration, and if so, who would pay for that? Another point that came up in the submissions was the date of the valuation of shares. Clause 7 states that date is to be the close of business on the day before the special resolution is voted on. That is the date that the Canada Business Corporations Act covers, which was the point that Dr Richard Worth mentioned when we were looking at other jurisdictions. Another area was the date at which minority shareholders would lose their legal and beneficial title to the shares. We will be covering that point in some detail during the Committee stage.

The points that I have made add value to this bill. We are very happy with it. We had a very good discussion on it at the select committee, and some other points will come up during the Committee stage.

This will be a very short call. New Zealand First will support the Companies (Minority Buy-out Rights) Amendment Bill because we recognise that it does improve the current situation. One of the concerns raised by New Zealand First members when we were reading the bill—we were not on the Commerce Committee—was the one of arbitration. It concerns us a little bit this morning, which is the very reason that I have taken the call, to hear the chairman of the select committee and one of the members of that committee register those concerns. There is no recommendation in the commentary coming back from the Commerce Committee as to how the arbitration problem, which was well outlined by Gerry Brownlee and to a lesser degree by Lindsay Tisch, will be addressed—in particular the one of cost. I want to put on record that New Zealand First has concerns around that. We will be supporting the bill because we recognise it is a significant improvement on the current situation, but we would like to have the arbitration question addressed. We would have preferred to have some comment from the select committee in the commentary.

Bill read a second time.

I raise a point of order, Mr Speaker. Earlier this morning a very interesting situation arose. There was a point of order from Mr Tremain in relation to the previous bill we were discussing—that being, I believe, the Customs and Excise Amendment Bill (No 3), which had provisions on tobacco. At the conclusion of the second reading debate on that bill, a vote was taken on amendments. The Assistant Speaker Marian Hobbs gave a ruling that the vote was taken at that point to give effect to the select committee’s amendments to the bill. I notice that the select committee I chaired made a number of amendments to this bill, but we appear not to have any such motion now. I want to clarify what the difference is between this bill and the Customs and Excise Amendment Bill (No 3) that means we deal with it in a different fashion.

The ASSISTANT SPEAKER (H V Ross Robertson): Thank you for that, Mr Brownlee. I am able to advise you that the requirement for a resolution relates only to amendments agreed to by a majority of the select committee.

Thank you. I learn something every day, particularly when you are in the Chair.

The ASSISTANT SPEAKER (H V Ross Robertson): You certainly do, Mr Brownlee. That is very true.

In Committee

Part 1 Amendments to Companies Act 1993