Court-approved schemes of arrangement have increased in popularity in New Zealand over recent years. Schemes have been used in particular to effect takeovers, corporate restructuring, and returns of capital to shareholders. However, there have been few occasions for the High Court to consider substantive opposition to a scheme. One such occasion is the decision in Re Metlifecare Limited [2020] NZHC 2752.
Metlifecare, a publicly listed company, sought orders approving a scheme of arrangement involving Asia Pacific Village Group Limited (Asia Pacific) acquiring all of the shares in Metlifecare. Until the day before the final orders were granted, a shareholder (and bondholder) in Metlifecare opposed the application.
The shareholder withdrew its opposition to the scheme after the Takeovers Panel announced that it proposed to issue a letter indicating that it had no objection to orders being made. However, the Court nonetheless considered that, given it had received a considerable amount of evidence from both the shareholder and Metlifecare, it needed to consider that material.
A previous attempt by Asia Pacific to acquire the shares in Metlifecare did not proceed after Asia Pacific gave notice that it was terminating the Scheme Implementation Agreement (SIA) on the basis, amongst other things, that the COVID-19 pandemic constituted a material adverse change under the terms of the SIA. Metlifecare did not accept that the SIA had been validly terminated, and sought a declaration from the Court to that effect. Metlifecare applied for initial orders to commence the process for approval of the scheme of arrangement. This led to a rare instance of the High Court declining an application for initial orders (for further information see our update here).
In July 2020, Asia Pacific approached Metlifecare with a further indicative non-binding offer. The Board of Metlifecare entered into a new SIA with Asia Pacific. A term of that new SIA was that the litigation between Metlifecare and Asia Pacific was discontinued.
Metlifecare obtained initial orders from the Court and convened a shareholders' meeting to vote on the scheme. The independent adviser's report placed the $6.00 per share consideration below the mid-point in its fair value range.
Of votes cast at the meeting based on shareholding, 90.70 per cent were in favour of the resolution and 9.14 per cent were opposed to it. Although this was easily in excess of the 75 per cent support threshold required, the support was less than has been seen for other New Zealand schemes, which has been observed in the high 90 per cent range. Notably, the New Zealand Shareholders' Association advised that it would vote against the scheme, using proxies it held.
The objecting shareholder voted against the proposal and filed a notice of opposition. The shareholders' objections are discussed further below.
The Takeovers Panel considered its position first and ultimately determined that it would issue its "no objection" statement. In this regard, the Takeovers Panel saw its role as one to evaluate the disclosure and compare that to what would be required in a Takeover Offer.
The test for Court approval of a scheme of arrangement
In considering the application for final orders, the Court applied the conventional common law criteria:
- Has there been compliance with the relevant statutory provisions?
- Has the company fairly put the scheme to the class or classes of shareholders affected by the proposal?
- Were those classes fairly represented by those who attended the meeting?
- Did those who attended the meeting act bona fide and without coercion?
- Is the arrangement such that an intelligent and honest business person might reasonably approve it?
- In cases where there are competing interests, is the scheme fair and equitable?
The shareholder's objection focused on:
- the adequacy of disclosure in the Scheme Booklet;
- the substantive question of whether or not the scheme is one to which an intelligent and honest business person would agree; and
- whether the scheme would materially prejudice the shareholder's position as the holder of bonds issued by Metlifecare.
Adequacy of disclosure
In our view, this was the main aspect of the objection. Schemes in other jurisdictions have been challenged on the basis of defects in the disclosure. For example, in the matter of Kasbah Resources Limited (No 2) [2016] FCA 1518, the Federal Court in Australia declined approval of a proposed scheme of arrangement when it was admitted that a fundamental error had been identified in the valuation methodology in the independent report. This saw a change in the conclusion in the fairness opinion from “fair and reasonable” to “not fair, but reasonable”.
In the Metlifecare scheme, the opposing shareholder argued that, based on the Scheme Booklet, shareholders did not know that many of those canvassed by the company’s financial advisor were overseas hedge funds with highly strategic and short-term investment interests. The argument was that this meant shareholders could not make an informed decision as to whether to follow the lead of those shareholders and/or to place weight on the fact that a majority of directors supported the scheme. The Judge did not accept that the Scheme Booklet should contain this level of detail: it was for shareholders to decide whether to vote for or against the scheme based on their own circumstances and not those of other shareholders. The Court accepted that in any publicly listed company the aims and aspirations of shareholders will inevitably differ.
The shareholder also provided its own expert report criticising the report of the independent adviser that was supplied to shareholders. The independent adviser in turn responded to those criticisms. However, in considering whether to grant final orders the Court declined to analyse in detail the points raised, noting:
- All of the issues were at least contestable and that any difference in ultimate outcome if the criticisms are valid was likely to be minor.
- Some of the points raised by the shareholder's expert would require the independent adviser's report to descend to a level of detail that would hinder rather than assist shareholders in making their decisions whether to vote in favour of the resolution.
- The expert did not conclude that the independent adviser's report significantly undervalued Metlifecare shares, or suggest an alternative value range. Instead, the expert's rather benign conclusion was that the valuation range "could be higher" than assessed by the independent adviser. This implicitly conceded that the value may have been in the range suggested by the independent adviser.
- The range of values identified in the second independent adviser's report was identical to that contained in the report prepared in relation to Asia Pacific’s earlier offer to acquire the shares for the sum of $7 per share. By August 2020, shareholders were acutely aware Asia Pacific was offering to pay significantly less for their shares than had been the case just seven months earlier, but voted overwhelmingly to take the deal.
The Court emphasised that any attempt to reach a firm view on the competing arguments without the benefit of cross-examination would be futile.
The burden on an objector in opposing an application for final orders is substantial, particularly given that a proponent will submit an independent adviser's report to shareholders and as part of its application for Court orders.
Merits of the scheme
The shareholder had raised a substantive argument against the merits of the scheme. However, the bar for the Court to second guess shareholders is high; to decline approval on this substantive ground the Court would need to conclude that the scheme is one to which an intelligent and honest business person would not agree.
The difficulty of successfully convincing a Court that this is the case where the requisite majority of shareholders has voted for the scheme is underlined in this judgment. The Court considered the fact that more than 90 per cent of votes were cast in favour of the scheme to be a strong endorsement of the scheme, including by obviously sophisticated and intelligent institutional investors. Similarly, the Court took into account that it considered that the shareholder did not speak for a significant proportion of Metlifecare's shareholders.
The Court also relied on the fact that the offer of $6 per share was within the valuation range assessed in the independent adviser's report, and represented a premium of almost 15 per cent over the price Metlifecare's shares were trading at immediately prior to the announcement of the new offer. The Court also noted that the $6 per share price represented significant premiums on the company's one and three-month volume weighted average price.
The Court also held that an intelligent business person would also have been aware that rejection of the scheme would inevitably cause the company’s share price to fall sharply in the short to medium term.
Of course there are also arguments to the contrary – including the intervening rise in asset values that were observed in the period between when the scheme was announced and when the notice of meeting was provided to shareholders.
We think it would be a risky proposition going forward for a proponent of a scheme to discount an objection based solely on the size of the objector's shareholding. However, this case does imply that when it is apparent that directors of the target have followed a proper process, the Court is unlikely to second-guess matters of business judgment – particularly where there is support from sophisticated shareholders and independent advisers.
Risks to bondholders
The shareholder had acquired Metlifecare bonds on 3 September 2020, which rank equally with Metlifecare’s bank debt but behind security interests totalling approximately $1.5 billion. The shareholder argued that there are significant risks for bondholders if the scheme was permitted to proceed. Many of these risks related to flow on effects to bondholders as a result of Metlifecare shares being de-listed under the scheme.
The Court dismissed this argument, finding that the scheme does not have any legal consequences for bondholders. The Court noted that Metlifecare will continue to be bound by the contractual obligations to bondholders that it assumed when it issued the bonds on the open market, and the debt would remain listed and subject to the same legal regulation and oversight.
The Court also held there is no reason to believe Metlifecare’s financial performance is likely to deteriorate in the future to the point where the interests of bondholders will be jeopardised or prejudicially affected.
The Court also seemed to place weight on the particular circumstances of the shareholder, in electing to acquire its bonds well after the current scheme had already been announced. This is perhaps interesting, as it focuses analysis on the circumstances of a (former) objector, as opposed to considering the interests of bondholders as a whole.
Creditors – a final note
The same flexible provisions of Part 15 of the Companies Act can be deployed to effect schemes of arrangement between a company and its creditors. Creditors' schemes of arrangement can be powerful restructuring tools in the right circumstances, but have been less frequently used in New Zealand.
The (withdrawn) opposition on the ground of the impact to bondholders highlights that even in a shareholders' scheme of arrangement, the rights of creditors need to be carefully considered. Where a scheme could be argued as materially altering a creditors' legal position or sufficiently concerning creditors' rights or interests, their approval of the scheme may be required: Re CMPS&F PTY Ltd (1997) 15 ACLC 1,287.
However, it is important to note that the Court's first response to the potential effect on bondholders was that Metlifecare will continue to be bound by the contractual obligations to bondholders that it assumed when it issued the bonds on the open market. This is a reminder of the need for creditors to consider, where possible, "change of control" consents and other protections in their contractual provisions.
A copy of the judgment can be found here.
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