In the last several years, there has been increasing popularity in using court-approved schemes of arrangements under Part 15 of the Companies Act 1993 (Act) to undertake transactions. In particular, schemes of arrangement have become particularly popular to effect takeovers, corporate restructuring, and returns of capital to shareholders.
As part of their response to the COVID-19 pandemic, companies may consider using schemes of arrangement as a flexible tool to reorganise their affairs. This could take place via a shareholders' scheme of arrangement, whereby companies may seek to restructure their business to minimise the effects of the pandemic and capitalise on any opportunities that arise, and/or return surplus capital in order to provide shareholders with a much needed capital return. In addition, there is considerable scope for creditors' schemes of arrangement to be used to restructure a company's debt, including in conjunction with the Government's Business Debt Hibernation (BDH) procedure here.
Russell McVeagh is the market leader in this area. We have acted on many schemes of arrangement in New Zealand to effect a variety of transactions. This round-up discusses recent takeovers, corporate restructurings, and returns of capital given effect by scheme of arrangement. Russell McVeagh has also produced a short guide to schemes of arrangement in New Zealand, which can be found here.
Prior to 2014, takeover schemes of arrangement were rare. A key reason for this was the negative attention of the Takeovers Panel (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 now provides guidance for code companies navigating their way through the scheme legislation.
Russell McVeagh has acted on several 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 Takeovers Code process) will continue to persist in the long-term, particularly where the bidder wants "all or nothing" or where required regulatory approvals mean that the takeover timeline may not be achieved (with no timeline being applicable for a scheme). Although New Zealand is faring better than many other countries, it too has been (and will continue to be) adversely affected by the COVID-19 pandemic. Indeed, we have seen at least two takeover schemes of arrangement fall over as bidding companies have terminated the scheme because of the impact of the pandemic (although one has been resurrected, albeit at a lesser price).
Metlifecare Ltd v Asia Pacific Village Group Ltd (June 2020)
Metlifecare Ltd (Metlifecare), one of New Zealand's largest retirement village providers, entered into an original scheme implementation agreement (SIA) with Asia Pacific Village Group Ltd (Asia Pacific). Under the SIA, Asia Pacific would acquire all the shares in Metlifecare for NZ$7.00 per share. The takeover would be implemented by way of scheme of arrangement. This is an example of a "transfer scheme" where the shares in the target company (in this case, Metlifecare) are transferred to a bidder in exchange for target shareholders receiving consideration for those shares.
Asia Pacific subsequently purported to terminate the SIA on the basis, among other things, that the COVID‑19 pandemic constituted a material adverse circumstance. Metlifecare did not accept that Asia Pacific validly terminated the SIA and sought a declaration from the High Court that the SIA remained in force (Termination Litigation). Metlifcare applied for initial orders, as is routine practice for schemes of arrangement, including the holding of a shareholders' meeting to approve the scheme and continue the Termination Litigation. Asia Pacific opposed the initial orders being granted on the grounds that it would be inappropriate and premature pending resolution of the Termination Litigation.
The High Court dismissed the application for initial orders. The Court considered it did not have jurisdiction to make the initial orders under s 236(2) because, as matters stood, it was unclear whether an arrangement to which such orders could be made existed or not (that was the subject of the Termination Litigation). The Court also held that even if it had jurisdiction to make the orders sought, it would have exercised its discretion against making the initial orders.
The case is interesting because, as the Court itself recognised, many applications for initial orders are straightforward and uncontroversial and, in practice, the circumstances in which the Court will decline to make initial orders under s 236(2) are likely to be rare.
The Termination Litigation has since been discontinued. As of 10 July 2020, Metlifecare has now entered into a new scheme implementation agreement with Asia Pacific. Under this new scheme, Asia Pacific will acquire all of Metlifecare's shares for NZ$6.00 each, a dollar less than the value under the earlier terminated deal. This new price puts the value of the transaction at NZ$1.28bn. Notably, the new scheme implementation agreement does not contain a material adverse change clause.
Abano Healthcare Group Limited (March 2020)
Abano Healthcare Group Limited (Abano) and Adams NZ Bidco Limited (Bidco) entered into a scheme implementation agreement (SIA) whereby Bidco would acquire all the shares in Abano for NZ$5.70 per share. The Abano scheme is another example of a "transfer scheme". Shareholders approved the scheme on 20 March 2020. However, on 24 March 2020, Abano announced that it had closed all its New Zealand dental practices following the Government's decision to move into Alert Level 4 because of the COVID-19 pandemic.
Abano subsequently gave notice under the SIA that there were circumstances that may give rise to a material adverse circumstance. On 30 March 2020, Abano announced the SIA with Bidco had been terminated because of the material adverse change and, accordingly, the scheme was not implemented.
There appears to be continuing interest in Abano. On 29 June, the Board announced that it was considering a revised non-binding, indicative offer to acquire all of the Abano shares by way of scheme of arrangement from a party. Further, on 9 July, Abano confirmed it was continuing to evaluate proposals it had received from third parties and would keep shareholders informed.
Trade Me Group Limited (April 2019)
Russell McVeagh acted for Trade Me Group Limited (Trade Me) in connection with a takeover by way of scheme of arrangement by Titan AcquisitionCo New Zealand Limited (Titan), a New Zealand incorporated company owned by a series of private equity investment funds. The Trade Me scheme is another example of a "transfer scheme".
At the time of the scheme, Trade Me was dual listed on both the NZX and ASX, had nearly 10,000 shareholders, and net assets of approximately NZ$750m. Titan acquired 100 per cent of Trade Me's shares. In exchange for their shares, each Trade Me shareholder received consideration of NZ$6.45 per share. In total, the value of the takeover was NZ$2.56bn, which represents, by some magnitude, the largest takeover by way of scheme of arrangement in New Zealand's history.
Westland Co-operative Dairy Company Limited (July 2019)
Westland Co-operative Dairy Company Limited (Westland) entered into a scheme with Hongkong Jingang, which provided for Hongkong Jingang to purchase all the shares in Westland. In exchange for their shares, each Westland shareholder was to receive NZ$3.41 per share. Following the acquisition, Westland would cease to be a co-operative company. The scheme also guaranteed by way of Commitment Deed, that Hongkong Jingang would commit Westland to accepting and collecting milk from each qualifying farm for 10 years from the scheme's implementation date, providing extra value to shareholders.
The Westland scheme is another example of a "transfer scheme", but with enhanced features.
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 override the company's constitution and provisions of the Companies Act, enable the implementation of complex schemes. Russell McVeagh has acted on a number of these complex restructurings including for Heartland Bank in its restructure.
Heartland Bank Limited (October 2018)
Heartland Bank Limited (Heartland Bank) carried out a restructure by way of scheme of arrangement. Under the restructure, shareholders in Heartland Bank transferred their shares to a new company, Heartland Group Holdings Limited (Heartland Holdings) in exchange for shares on a one-for-one basis in Heartland Holdings. Heartland Bank also transferred its ownership of the Australian division, Heartland Australia Holdings Pty Ltd (Heartland Australia), to Heartland Holdings. Heartland Bank then became a wholly owned subsidiary of Heartland Holdings, and Heartland Bank shareholders became Heartland Holdings shareholders.
In short, the effect of the scheme was that Heartland Holdings became the new ultimate holding company of the Heartland group (and listed on the NZX and ASX), with separate wholly owned subsidiaries managing the Australian and New Zealand businesses.
The restructure allowed both the Australian and New Zealand businesses to grow, while remaining compliant with the conditions of Heartland Bank's registration as a registered bank (as set by the New Zealand Reserve Bank). The New Zealand Reserve Bank had approved the restructure prior to the Court's approval of the scheme, subject to certain administrative conditions. These conditions had been, or would be, met at the time of the Court's approval.
Returns of capital
Schemes of arrangement have also been used by companies to return surplus capital to shareholders in a timely, cost effective, and tax efficient manner. In recent years, there have been many returns of capital.
Tilt Renewables Limited (June 2020)
Russell McVeagh advised Tilt Renewables Limited (TLT), a leading developer, owner, and manager of renewable energy generation assets in Australasia, on its return of A$260m of capital to shareholders by way of scheme of arrangement. The scheme followed the highly successful sale of TLT's Snowtown 2 Wind Farm in December 2019 for an enterprise value of A$1,073m.
The scheme is an example of a "cancellation scheme", whereby one share for every five shares was cancelled and payment of NZ$2.91 per share cancelled was made to shareholders.
The High Court accepted that s 236A of the Companies Act, which relates to arrangements or amalgamations involving code companies, did not apply to the scheme because the scheme, being a pro rata return of capital, would not affect the relative voting and distribution rights of shareholders. Justice Muir's judgment (available here) should provide additional certainty to code companies contemplating a pro rata return of capital by way of scheme of arrangement, and their legal advisors, that the additional requirements in s 236A will not apply to their scheme.
Other recent returns of capital by way of scheme of arrangement include:
- A return of NZ$234m by PGG Wrightson Limited in July 2019, following the sale of its seeds division.
- A return of NZ$43m by Tenon Limited in April 2017 following the sale of the group's remaining operating business and most substantial asset Clearwood.
- A return of NZ$100m by NZ Oil and Gas Limited in May 2017 following the sale of its interest in the Kupe gas and oil fields to Genesis Energy Ltd.
Looking forward: increased scope for creditors' schemes of arrangement
Whilst the transactions above demonstrate the high profile of shareholders' schemes of arrangement in New Zealand, schemes of arrangement between a company and its creditors have been less well-used in New Zealand. The same flexible provisions of Part 15 of the Companies Act can be deployed to effect creditors' schemes of arrangement.
However, a risk of using a scheme of arrangement for an insolvent restructuring is that the scheme procedure offers no moratorium over enforcement action against the company during the period the scheme is under consideration. This position is in contrast to voluntary administration, a procedure under which a restructuring plan in the form of a Deed of Company Arrangement can be developed and proposed under cover of a broad-ranging moratorium on enforcement action (albeit one that requires control of the company to be handed over to administrators).
Parliament has enacted a new form of insolvency procedure, BDH, specifically in response to the COVID-19 pandemic. A company which enters BDH can, with the support of its creditors, gain six months of protection from enforcement action. This means companies could use the BDH procedure for "breathing space" to propose a scheme of arrangement to effect a longer-term restructuring of their debt.
Even outside of BDH, if New Zealand businesses are dealing with complicated restructuring challenges in the wake of the COVID-19 pandemic, the flexibility of schemes of arrangement in New Zealand, and their relative popularity for complex restructurings in other jurisdictions, combine to suggest we will see creditors' schemes of arrangements rise in popularity over the coming years.
A Guide to Schemes of Arrangement in New Zealand
In addition to the above 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.