Delegat's Wine Estate Ltd v Takeovers Panel HC Wellington CIV 2005-485-2047
[2005] NZHC 516
•7 October 2005
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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2005-485-2047
UNDER Part I of the Judicature Amendment Act
1972
IN THE MATTER OF Interim Restraining Orders made by the
Takeovers Panel of 14 September 2005 and
22 September 2005
BETWEEN DELEGAT’S WINE ESTATE LIMITED Plaintiff
ANDTHE TAKEOVERS PANEL Defendant
CIV-2005-485-2058
IN THE MATTER OF The Takeovers Act 1993
BETWEEN THE TAKEOVERS PANEL Plaintiff
ANDDELEGAT’S WINE ESTATE LIMITED First Defendant
ANDOYSTER BAY MARLBOROUGH VINEYARDS LIMITED
Second Defendant
Hearing: 7 October 2005
Appearances: B Keene/J Anderson for Delegat’s Wine Estate Limited
R Dobson QC/M O’Brien for The Takeovers Panel
R Fardell QC/N Scott for Oyster Bay Marlborough Vineyards Limited
Mr Camp QC/Ms Radich for Peter Yealands Investments Limited
P R Jagose/P McRae for D H Rankin
Judgment: 7 October 2005
JUDGMENT OF MILLER J
DELEGAT’S WINE ESTATE LIMITED V THE TAKEOVERS PANEL HC WN CIV-2005-485-2047 [7
October 2005]
Table of Contents
Introduction 3 Oyster Bay and Delegat’s 6 The Target Company Statement 7 The Ferrier Hodgson report 8 Takeovers Panel Decisions 9 The application for judicial review 13 The Panel’s application for interim orders 14 The other parties’ positions 15 The Delegat’s letter of 4 October 16 Whether the encumbered and unencumbered value of Oyster Bay’s vineyards was information that might reasonably be material to its shareholders? 16 Whether Takeovers Panel may restrain Delegat’s following an omission in Oyster Bay’s Target Company Statement? 21 Is it too late for the Panel to intervene? 24 The Takeover Panel’s application for interim restraining orders 25 Result 26 Costs 26
Introduction
[1] Oyster Bay Marlborough Vineyards Limited (Oyster Bay) owns or leases some 301 hectares of prime wine-growing land in Marlborough. Under a series of long-term agreements it sells its grapes to Delegat’s Wine Estate Limited (Delegat’s), which also manages its operations.
[2] As at 4 June this year, Peter Yealands Investments Limited (Yealands) held
6.71% of Oyster Bay’s issued share capital, and Delegat’s held 32.58%. On that date
Yealands made a partial takeover offer for shares sufficient to take its holding to
51.1%. The price offered was $3.10 per share.
[3] Delegat’s responded on 7 July with a partial takeover offer intended to take its shareholding to 50.1%. It offered $3.35 per share. Both offers were increased in a series of steps to $4.00 by the end of July. They were scaled, meaning that if the offeror received acceptances for shares in excess of the number sought, the acceptances would be scaled back, with the result that in those circumstances selling shareholders would continue to own shares.
[4] Both offers were subject to the Takeovers Code because Oyster Bay is party to a listing agreement with New Zealand Exchange Limited. On 19 July, Oyster Bay complied with its obligation under the Takeovers Code to issue a Target Company Statement. Attached to it was an independent report by Ferrier Hodgson, Chartered Accountants. That firm valued Oyster Bay at $2.39 to $3.15 per share on a discounted cashflow basis, and $3.26 on a net tangible assets basis.
[5] The NTA valuation was based on property valuations undertaken by Logan Stone Limited in July 2004. Those valuations were not attached to the report. Ferrier Hodgson explained that Logan Stone assessed the value of the land and vineyard improvements “on an income basis, in accordance with the New Zealand Institute of Valuers Valuation Standard Number 3 – Valuation for Financial Statements, and Practice Standard Number 3 – The Valuation of Rural Properties”.
On that basis, Logan Stone valued the land and improvements at $45 million, from which Ferrier Hodgson derived its NTA value of $3.26 as at 31 December 2004.
[6] The “income approach” adopted by Logan Stone was in fact a discounted cashflow based on the prices paid by Delegat’s for grapes under the long term agreements with Oyster Bay. Based on sales of comparable prime vineyard land in Marlborough, Oyster Bay’s land-holdings may be worth $90 million on an unencumbered basis. That would increase NTA to more than $8.00 per share, assuming the land could be sold free of the Delegat’s agreements.
[7] On 9 August Delegat’s announced that it had secured acceptances in respect of the minimum number of shares required, and it lodged a substantial security holder notice disclosing a relevant interest in 51.66% of the issued share capital of Oyster Bay.
[8] Yealands and Peter Rankin, who is also an Oyster Bay shareholder, complained to the Takeovers Panel after 9 August that Ferrier Hodgson had undervalued Oyster Bay’s land. Mr Rankin, who is a valuer, contended that the market value of the land is $90.75 million, based on Valuation Standard No. 3 and Practice Standard No. 3, which Logan Stone were said to have relied upon. He said those standards require that valuations be undertaken based on market value of the land, taking into account comparable sales in the same area, and asserted that there is no reference in the standards to an “income approach”. Yealands complained that Ferrier Hodgson’s reported NTA valuation was simply a re-calibration of Logan Stone’s discounted cashflow valuation; as such, it was not an NTA valuation at all. It argued that the only asset valued was Oyster Bay’s income stream; the land itself had been ascribed no value.
[9] The Yealands offer closed on 26 August, having received acceptances in respect of 1.1 million of the 4 million shares required. Yealands and Mr Rankin accepted the Delegat’s offer, which closed on 19 September.
[10] The Takeovers Panel found that the unencumbered market value of Oyster
Bay’s vineyard assets was $90 million, implying an NTA valuation of more than
$8.00 per share. If Delegat’s obtained majority voting control of Oyster Bay, it was unlikely that Oyster Bay would initiate moves to unwind the long term contracts so as to unlock the land value for shareholders. The Panel concluded that information about the market value, encumbered or unencumbered, of Oyster Bay’s freehold and leasehold vineyards could reasonably be expected to be material to shareholders’ decisions to accept or reject the Delegat’s offer. The panel resolved, in terms of sections 32(4)(a) and (b) of the Takeovers Act 1993, to restrain Delegat’s from acquiring securities in Oyster Bay or any interests in or rights relating to such securities, to direct Delegat’s not to declare its offer unconditional, and to direct Oyster Bay not to register the transfer or transmission of any securities arising from acceptances of the Delegat’s offer. The orders were expressed to expire at the close of 13 October 2005.
[11] Delegat’s offer became unconditional on 3 October, and settlement is scheduled for 10 October.
[12] The central issue in Delegat’s application for judicial review is whether it was open to the Panel to conclude that the unencumbered value of Oyster Bay’s vineyard assets might be material to a shareholder contemplating the Delegat’s offer. Delegat’s says the unencumbered value of the land is irrelevant to shareholders because the long term contracts will remain in place until various dates between
2049 and 2067 and Oyster Bay has no relevant right to terminate them before that time. Delegat’s also says the Panel had no jurisdiction to issue the restraining orders because it is too late; Delegat’s is contractually bound to shareholders who have accepted its offer. It also says the Panel erred by holding Delegat’s accountable for errors made by Oyster Bay in its Target Company Statement.
[13] The Panel has filed an application for interim orders under s37 of the Takeovers Act restraining Delegat’s from doing any act for the purpose of acquiring securities in Oyster Bay and restraining Oyster Bay from registering transfers or transmission of securities arising from Delegat’s offer.
Oyster Bay and Delegat’s
[14] Oyster Bay was incorporated in 1999 to own and lease vineyards. Delegat’s was a founding shareholder. Delegat’s and Oyster Bay entered into a Long Term Co-operation Agreement, a Grape Purchase Agreement, and a Vineyard Management and Administration Agreement.
[15] On 19 May 1999, Oyster Bay offered nine million shares to the public at an issue price of $2.00 to fund the purchase from Delegat’s Group Limited (the parent of Delegat’s) of two vineyards known as the Airfields and Giffords Creek Vineyards. Delegat’s undertook to retain not less than 20% of the shares in Oyster Bay for a period of five years.
[16] In 2002 Oyster Bay acquired the Fault Lake Vineyard from Delegat’s and leased the Wairau River Vineyard. The four vineyards together comprise some 301 hectares of planted grapes. Further grape purchase, co-operation, and management agreements were entered.
[17] Assuming that certain rights of renewal are exercised, the Delegat’s – Oyster Bay agreements will expire at dates between 2049 and 2067, depending on the vineyard.
[18] The evidence of Robert Lawrence Wilton, chairman of Delegat’s Group Limited and Delegat’s, was that the commercial effect of the Delegat’s - Oyster Bay agreements was that Oyster Bay could operate only the business of owning vineyards and growing grapes, that the vineyards could not be sold without Delegat’s consent, which could not be unreasonably withheld, that on any sale the transferee must accept Delegat’s rights to manage the vineyards and buy all of the grapes, that Delegat’s had a right of first refusal on a sale or lease and any offer made by another party must be referred to Delegat’s for it to match that offer if it wished, that Oyster Bay would sell all the grapes it produced to Delegat’s during the currency of the agreements, that Delegat’s administers Oyster Bay and manages the wines and vineyards, that Delegat’s must hold a minimum of 20% of the shares of Oyster Bay, and that there are limited termination rights covering insolvency or deterioration of
Delegat’s financial position, failure for three consecutive years of the Oyster Bay vineyards to produce grapes, three consecutive decisions against Delegat’s by an independent expert or arbitrator in dispute resolution proceedings, or termination of the grape purchase agreements. Similar restrictions are imposed on Oyster Bay under its constitution.
The Target Company Statement
[19] Rule 18 of the Takeovers Code required that Oyster Bay’s directors obtain a report from an independent adviser on the merits of the Delegat’s and Yealands’ offers having regard to the interests of those persons who might vote to approve the acquisitions. The directors were also required under R 19 to provide a written statement as to whether they recommended approval or disapproval of the acquisitions, or were not making a recommendation, and to give their reasons. Rule
46 required that Oyster Bay must send a statement containing or accompanied by the information specified in Schedule 2 to the offeror and every offeree.
[20] Clause 18(5) of Schedule 2 provided that the information acquired in the
Target Company Statement was to include:
Any other information about the assets, liabilities, profitability, and financial affairs of the target company that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.
[21] And cl 24 provided that the Target Company Statement was to include:
Any other information not required to be disclosed by this Schedule that could reasonably be expected to be material to the making of the decision by the offerees to accept or reject the offer.
[22] Oyster Bay issued two Target Company Statements on 19 July, one in respect of each offer. Both attached the Ferrier Hodgson report. At that date, both offers stood at $3.50 per share. Oyster Bay’s independent directors advised that at that price both offers contained a premium for control over the valuation of $2.39 to
$3.15 per share determined by Ferrier Hodgson, and both offers were above Oyster
Bay’s net tangible asset value of $3.26 per share as assessed by Ferrier Hodgson.
The independent directors recommended that those shareholders who wished to maximise their immediate financial return should accept the Yealands offer, while those who wished to sell some of their shares at a premium and continue to take the major part of their returns over time should accept the Delegat’s offer. (Because Delegat’s already held 32.58%, shareholders other than Yealands would need to sell only a little more than one quarter of their holdings to Delegat’s for its offer to succeed.)
The Ferrier Hodgson report
[23] As already noted, Ferrier Hodgson valued Oyster Bay on both discounted cashflow and net tangible asset bases. Ferrier Hodgson explained that its NTA valuation methodology was a variant of a methodology that assumed orderly realisation of assets. It could be used as a method for valuing businesses “where the underlying assets are stated at their approximate market value”. The net tangible assets represented the residual value of the business available to equity holders after consideration of external funding of the assets. Such a valuation required an assessment of the realisable value of the company’s assets and liabilities, including the expenses and losses that would be incurred on a break up or liquidation.
[24] Ferrier Hodgson considered the DCF valuation to be more appropriate because the Logan Stone valuations on which the NTA value was based might not be achievable in a break-up. The reason given was that the Logan Stone valuations were based on various vineyard management and administration agreements and grape purchase agreements. The report did not elaborate on this reasoning, but it did summarise the Delegat’s - Oyster Bay agreements in some detail. It stated:
7.4 NET TANGIBLE ASSET VALUE
The unaudited financial statements for the six months ended 31 December
2004 show net book value of shareholders’ equity at $16.5m. With 9 million shares on issue, this represents a NTA backing of $1.83 per share.
We have reviewed independent property valuations undertaken by Logan Stone Limited in July 2004. Logan Stone assessed the value of the land and vineyard improvement on an income basis, in accordance with the New Zealand Institute of Valuers Valuation Standard Number 3 – Valuation for
Financial Statements, and Practice Standard Number 3 – The Valuation of
Rural Properties. The Logan Stone valuations are summarised as follows:
Table 7.6: Logan Stone Valuation of Land and
Vineyard improvements
$M Oyster Bay Vineyard
Fault Lake Vineyard - Freehold
- Leasehold
Wairau River Vineyard - Leasehold
28.3
3.9
6.56.3
Total Value of Land and Vineyard Improvements 45.0
Takeovers Panel Decisions
[25] Following the complaints from Yealands and Mr Rankin, the Panel called for submissions on 19 August. On 14 September it issued interim restraining orders the effect of which was to preclude Delegat’s from declaring its offer unconditional and to direct Oyster Bay not to register transfers of securities arising from acceptances of the Delegat’s offer.
[26] Delegat’s, Oyster Bay, Yealands, and Mr Rankin were represented at the hearing before the Panel on 20 September. The Panel heard from Mr Bill Falconer, an independent director of Oyster Bay, Mr Yealands, Mr Rankin, Ferrier Hodgson, and Logan Stone.
[27] Oyster Bay’s stance before the Panel was that its independent directors had carefully considered whether to disclose the unencumbered market value of the vineyards, and had decided it would be misleading and dangerous to do so. That would require directors to speculate as to the probability of the long term contracts being terminated, requiring an unreliable prediction based on unknown future circumstances. Such speculation would have been misleading, as it might imply to shareholders that the margin between the income-based encumbered and the unencumbered value could be secured by Oyster Bay shareholders at some future date. In fact, according to the directors, there was no prospect of realising any such margin without Delegat’s agreement, a possibility they did not consider realistic. If Delegat’s did agree to terminate the contracts, it could be expected to insist on compensation. It was submitted that information is not material to shareholders unless it is reliable, informative, and important.
[28] Logan Stone took issue with Mr Rankin’s claim that the Valuation and Practice Standards did not provide for DCF valuations. They submitted that there were no comparable sales of properties subject to similar agreements. They pointed out that in those circumstances, Valuation Standard No. 3 allows the valuer to consider “value in use”, which is the present value of the future cash-flows obtainable from an asset’s continuing use and ultimate disposal.
[29] The Panel identified the issue as whether information about the encumbered and unencumbered market value of Oyster Bay’s vineyards comprised information about its assets and financial affairs that could reasonably have been expected to be material to shareholders’ decision to accept or reject the Delegat’s offer. If so, such information ought to have been included in the Target Company Statement under r 46 of the Code and clauses 18(5) and 24 of Schedule 2.
[30] The Panel began its reasoning by recording that the Target Company Statement is a fundamentally important document in a takeover, as it contains important factual information about the target company to assist shareholders and includes an independent adviser’s report and directors’ recommendation. When considering whether information could reasonably be expected to be material to the making of a decision by shareholders, the Panel considered that directors of target companies should take into account the following points:
a.The question whether particular information could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer is essentially a question to be resolved having regard to the particular circumstances.
b.The issue of reasonableness requires an objective test based upon an hypothetical reasonable director in the position of having responsibility for preparing the TCS, and without reference to the actual subjective views of the target company directors in that position. Directors have to be careful to avoid prejudging the capacity of their company’s shareholders to assimilate complex information. The responsibility rests with directors to provide information in a form which allows shareholders the opportunity to understand and interpret it for themselves.
c.The issue of materiality also requires an assessment as to whether the offerees would give some relative weight to the particular item of information, and include it as one of a number of factors to be considered, when determining whether to accept or reject the offer. The particular item of information on its own does not have to be so
significant as to be likely to determine an accept/reject decision one way or the other, but nor should it be so insignificant as to have no bearing on such a decision.
d.Particular care is required where the information is forward-looking and relates to or assumes a state of affairs which may or may not eventuate. Directors must assess the potential impact of the information on the decision of shareholders to accept or reject an offer and consider whether disclosure is appropriate.
[31] The Panel recorded that it was common ground that the vineyard assets had an unencumbered market value (that is, without the long term contracts in place) in the order of $90 million. It noted that Logan Stone had prepared market valuations of the vineyards in July 2004 of $65 million on an unencumbered basis, and $50 million on an encumbered basis.
[32] The Panel held:
57. The factors which the Panel considered to be material to its deliberations on these matters included:
a.The unencumbered market value of Oyster Bay’s vineyard assets of $90 million implies an NTA amount of Oyster Bay of $8.00 per share, significantly above Delegat’s offer price of $4.00 per share;
b.Delegat’s has stated that long-term security of grape supply is important and that it does not intend to withdraw from its contractual arrangements with Oyster Bay;
c.There is evidence that major international breweries and wine-making companies are interested in securing grape supply by acquiring New Zealand vineyards and appear to be influencing the rising price of vineyard properties in Marlborough and elsewhere;
d. One of the "Key Features" of the investment, as promoted in
Oyster Bay’s original 1999 prospectus, was:
Benefit from the value of the underlying properties. The net asset value per share (as per Logan Stone valuations) will be $1.04 per $1 invested upon subscription. Prime Wairau Valley viticultural land has appreciated strongly in value since 1995.
Oyster Bay’s reported vineyard asset values have declined between the 2001 and 2004 Annual Reports against a background of increasing land values in Marlborough during the same period;
e.The nature of the contractual arrangements with Delegat’s suggests that it would be extremely unlikely that Oyster Bay could sell its vineyard assets on an unencumbered basis;
f. If Delegat’s obtains majority voting control of Oyster Bay it could potentially control the composition of the board, making it even less likely that Oyster Bay would initiate moves to sell the vineyard assets or unwind the long term contracts; and
g. If Delegat’s obtains majority control, and in the absence of information about unencumbered market value, there is greater potential for value transfer if Delegat’s were to acquire further shares by way of the "creep" provisions of the Code in future years at share prices that are reflective more of income based valuations than of vineyard market valuations.
58.On the basis of the above analysis the Panel considered, having regard to all of the evidence available to it, that information about the market value, encumbered or unencumbered, of Oyster Bay’s freehold and leasehold vineyards could reasonably be expected to be material to the making of a decision by Oyster Bay shareholders to accept or reject the Delegat’s offer.
[33] The Panel determined under s32(3)(b) of the Act that it was not satisfied that Oyster Bay had acted in compliance with the Code. It resolved under s32(4)(a) and (b) to make orders:
a)Restraining Delegat’s from acquiring securities in Oyster Bay or any interest in or rights relating to such securities.
b) Continuing to direct Delegat’s not to declare its offer unconditional;
and
c)Continuing to direct Oyster Bay not to register the transfer or transmission of any securities arising from acceptance of the Delegat’s offer.
[34] The Panel recorded that its preferred outcome for those shareholders who had accepted Delegat’s offer was that they be given the opportunity to reconsider their decisions before the transaction was finally concluded. The Panel expected that process would take a little more than a month, during which time shareholders who had accepted the Delegat’s offer would be sent an additional statement by Oyster Bay’s independent directors, approved by the Panel, which would provide them with the information omitted from the Target Company Statement. They could either revoke their acceptances or allow them to stand.
[35] In a covering letter dated 22 September the Panel suggested that it could give Delegat’s and Oyster Bay exemptions from Rules 27, 28 and 29 of the Code to enable Delegat’s to vary its offer so the unconditional date would be extended to (say) 26 October 2005, and accepting shareholders would be given the ability to revoke their acceptances. The exemption would be given on the condition that Oyster Bay and Ferrier Hodgson would distribute a corrective statement, approved by the Panel, to inform accepting shareholders of the matters omitted from the Target Company Statement, and on the further condition that Delegat’s would give all accepting shareholders the opportunity to withdraw their acceptances. The Delegat’s offer would not be re-opened, and no variations would be possible during the period contemplated by the Panel.
The application for judicial review
[36] Delegat’s filed an application for review on 4 October, supported by affidavits from Mr Wilton, Christine Pears, the chief financial officer of Delegat’s, and John Hagen, an accounting expert.
[37] It was common ground that the Panel exercised a statutory power of decision for purposes of the Judicature Amendment Act 1972.
[38] In its pleading Delegat’s attacked in various ways the Panel’s reasoning that the unencumbered value of Oyster Bay’s land was a matter material to shareholders. It is said that the Panel erred in law by applying an incorrect test, took into account irrelevant matters and ignored relevant ones, and acted in an irrational or unreasonable manner. It also pleads that the Panel lacked jurisdiction to make orders against Delegat’s, since it was Oyster Bay rather than Delegat’s that was in breach of the Code, and that the Panel ought to have taken into account the fact that its orders had the effect of placing Delegat’s in breach of its contractual obligations to shareholders. Lastly, Delegat’s pleads that 19 September 2005 was the last day for acceptances under the Delegat’s offer and as of that date Delegat’s held equitable ownership in the requisite number of shares. That being so, it is said that the
22 September restraining order was ineffective, because the only matter remaining to be completed was payment to shareholders in respect of their entitlement under the
Delegat’s offer. Delegat’s seeks a number of declarations to the effect that the Panel’s decisions and restraining orders are wrong in law, invalid, and of no effect, an order under s4(2) of the Judicature Amendment Act setting aside the Panel’s decisions, and a declaration that Delegat’s may complete its partial takeover offer.
[39] The Panel argues that judicial review is misconceived. It submits that all issues arising from any Panel determination on compliance or non-compliance with the Code, as opposed to failures of the Panel’s processes, should be referred to the Court in its enforcement role under sections 33E to 44 of the Takeovers Act 1993. It is not necessary to resolve this issue for present purposes. I note Mr Keene’s point that Delegat’s could not apply under s35 without first obtaining the Panel’s consent or waiting for a period of up to 10 days after seeking the Panel’s consent.
The Panel’s application for interim orders
[40] On 6 October the Panel brought an application under sections 34 and 36 of the Act. Section 34 provides:
34 Court may make orders
The Court may, on the application of a person referred to in section 35 of this Act, if it is satisfied on reasonable grounds that a person has not acted or is not acting or intends not to act in compliance with the takeovers code, make any one or more of the orders specified in section 36 of this Act.
[41] Section 36 provides that the Court may make various orders, including an order directing the specified company (Oyster Bay) not to register the transfer or transmission of securities, an order restraining the disposal of securities, an order declaring any agreement for the acquisition of securities to be void and of no effect, an order declaring any agreement for the acquisition of securities voidable at the option of the vendor, an order restraining any person from engaging in conduct in contravention of the Takeovers Code, and an order restraining a person from, or doing any act for the purpose of, acquiring any such securities.
[42] As already noted, the Panel has sought interim orders. Under s37, the Court may make, as an interim order, any order that it is empowered to make under s36.
The Panel’s stance is that Delegat’s has made clear its intention not to comply with the Takeovers Code for purposes of s34, and that without Delegat’s and Oyster Bay’s co-operation it cannot insist on issue of a corrective statement and amendment to the offer to give shareholders an opportunity to reconsider. The Panel says it has been unable to reach agreement with Oyster Bay on the content of a corrective statement. It says any such statement must include the conclusions that it reached in paragraph 57 of its decision (paragraph [32] above).
The other parties’ positions
[43] Oyster Bay’s position before me was that it will co-operate with the Panel by issuing a corrective statement, if the Court considers that the Panel’s decision that the unencumbered value should have been included in the Target Company Statement was correct. It drew to my attention several considerations that it accepted had been taken into account by the Panel: Yealands made no higher offer than $4.00 per share although it knew of the value of the vineyards in their encumbered and unencumbered states; Delegat’s sought 1.5 million shares but received acceptances for 4.2 million; Mr Rankin knew of the difference in value; both Yealands and Mr Rankin accepted the Delegat’s offer at $4.00 per share after Yealands’ offer failed to meet the minimum acceptance level; and Yealands needed acceptances in relation to four million shares but received acceptances only in relation to 1.1 million. Mr Fardell also maintained that the independent directors were right to conclude that the unencumbered value was unrealisable and so was not material information that ought to have been included.
[44] Yealands and Mr Rankin were also heard. The former’s stance is that it wishes to make another offer, and to exercise a right under s35 of the Act to apply to the Court for orders restraining Delegat’s while that offer is made. In the meantime, Yealands supported the Panel’s application for interim orders.
The Delegat’s letter of 4 October
[45] By letter of 4 October, Delegat’s wrote to those shareholders who accepted its offer, advising of the Panel’s decision and setting out its perspective on the litigation. It invited shareholders “in order to assist the High Court in its deliberations” to acknowledge that they know of the “hypothetical” unencumbered value but nonetheless wish Delegat’s to proceed to acquire the shares according to its offer. Delegat’s has invited shareholders to sign and return an acknowledgement by
10 October. The acknowledgement form includes provision for the shareholder to signal a wish to withdraw. Delegat’s says it will allow shareholders to do so subject to compliance with the minimum acceptance level and any order of the Court or Panel. As at today’s date, Delegat’s has received confirmation in respect of 788,000 shares.
[46] The Panel takes exception to the Delegat’s letter. Its Senior Executive Officer, Mr Kerry Morrell, swore an affidavit in which he suggested that the letter breaches the Code because the qualified withdrawal right offered to shareholders amounts to a variation of the offer in respect of which the Panel’s approval has not been sought.
Whether the encumbered and unencumbered value of Oyster Bay’s vineyards was information that might reasonably be material to its shareholders?
[47] The central issue in both applications is whether the encumbered and unencumbered value of the vineyards might reasonably be material to shareholders considering the Delegat’s offer. In a judicial review context, the issue is whether it was open to the Panel to so conclude. But because the Court must make its own assessment when considering the Panel’s application for interim orders, counsel were content that I should deal with the two applications by considering for myself whether the information might reasonably be material to shareholders.
[48] Mr Keene argued that the information was not material unless it had some economic potency. There are no New Zealand authorities dealing with materiality under the Takeovers Code. Mr Keene referred to a number of Australian and
English authorities. He began with the proposition that a matter is material if it might reasonably affect, or tend to affect the decision of the ordinary investor whether or not to accept the offer in the particular circumstances of the bid: Cackett v Keswick [1902] 2 Ch 456 At 464. Materiality is a question of mixed fact and law to be determined on a case by case basis, taking into account evidence tendered to explain why some matters are and others are not material: ICAL Ltd v County Natwest Securities Australia Ltd (1988) 39 ESWLR 214. He submitted that a common sense approach is required, citing Metal Manufacturers Limited v Marsh Electrical Pty Ltd [1998] 29 ACSR 245 at 250:
Materiality to the making of a decision is a subject which does not have definite boundaries. A great many subjects can be woven into more or less defensible arguments that they are material to a decision referred to in [the equivalent of cl24]. It is not consonant with the purpose and policy of the legislation that a very extensive view of materiality should be adopted, or that everything which is not wholly extraneous should be treated as material. [The clause] is not a proposition from the Logic Schools but is one of the provisions of legislation which regulates takeovers in the contemplation that they are not forbidden or unreasonably impeded … [The clause] does not exist to create difficulties for those attempting to comply or to create a disclosure requirement of a significantly more searching kind than the more detailed specifications. Questions of materiality [under the clause 24 equivalent] are to be approached with due regard to the practicalities of the market.
[49] Mr Keene stressed that it was necessary to be astute to see that the deficiency relied upon is real and of substance, citing Gantry Acquisition Corp v Parker
& Parsley Petroleum Australia Pty Ltd (1994) 123 ALR 29 at 38:
Pronouncing on questions whether a Pt A statement is in breach of [provisions of the Corporations Law] is a responsible task. It is often a difficult one and thus one upon which minds will differ. The party complaining of a breach of the provisions will not infrequently be a competitor for the shares in question. Tactically the object is to take the other competitor out of the market. Hence the Pt A statements of competing bidders are gone through with toothcombs in the hope of finding something which will enable a competitor’s bid to be stopped or delayed. Undoubtedly this tends to serve the public interest which there is in there being an informed market. … But a consequence of this is that the stopping of one bid will tend to close the market down. It may then consist only of one bidder. Thus the public interest which there is in a competitive market is adversely affected. …
No doubt the presence of ss 739 and 743 of the Law, which enable the court to relieve a party against breaches of the Law in appropriate circumstances, enable the problem to be overcome in numbers of cases. But unless that is so, it does seem to me that a court asked to restrain the making of an offer
needs to be astute to see that the breach of the Law relied upon is real and of substance. Otherwise there is a risk that the public interest which there is in a competitive market will suffer. That should not occur unless it is tolerably clear that the breach … which is alleged to have occurred does involve the withholding of relevant information from shareholders.
[50] Lastly, he emphasised that the disclosure of speculation is unnecessary, and should be avoided: Cultus Petroleum NL v OMV Australia Pty Ltd (1999) 32 AC SR
1 at 12. I observe that the Court in that case also held it is not speculative to disclose a prediction, so long as the disclosure is accompanied by information or assumptions against which the prediction can be tested.
[51] I have already set out the Panel’s approach to materiality. In my view, its approach is consistent with the authorities cited, and appropriate to the circumstances of this case.
[52] Mr Keene argued that the Panel did not consider market practicalities, whether the breach of the Code concerned an issue that was real and of substance, and whether the breach was in respect of an issue that was speculative in nature. These submissions rested on the proposition that none of the value in the Delegat’s – Oyster Bay contracts could be unlocked for Oyster Bay and its shareholders.
[53] I have reached the clear view that the encumbered and unencumbered value of the vineyards was information that could reasonably be expected to be material to shareholders.
[54] The starting point is that the discrepancy between the Logan Stone ‘income’ valuation of $45m and the unencumbered value of $90m reflects the value that has been captured by Delegat’s under the long-term agreements. There is force in the evidence of Greg Antony Anderson, an economist engaged by Mr Rankin, that the discrepancy suggests either that the DCF model used to assess the encumbered land value has been applied incorrectly or that Delegat’s is paying a below-market price for grapes. Mr Fardell resisted, arguing that the current market values of vineyard land in Marlborough may be a fleeting phenomenon resulting from the decision of major brewing companies to move into wine-making. That may be so, but it seems unlikely and in any event it is an issue for shareholders to evaluate for themselves.
[55] Had the magnitude of the economic rents at stake been disclosed to shareholders on 19 July, they could have been expected to reflect upon two issues. The first is whether any part of the unencumbered value might be made available to Oyster Bay shareholders, should Delegat’s offer succeed. The Panel’s conclusion that it would not seems entirely logical. The second is whether the position might differ if a non-Delegat’s party such as Yealands were to acquire control of Oyster Bay. The Ferrier Hodgson report advised that Yealands, if successful, could remove Oyster Bay’s current directors and appoint its own representatives in their place, so securing control of Oyster Bay’s board. That conclusion was not disputed before me. The issue that shareholders would have been called upon to consider was whether and to what extent Oyster Bay might, over time, be able to extract value by re-negotiation or strict enforcement of the agreements.
[56] Mr Keene embarked on the herculean task of attempting to persuade me that the agreements afford Oyster Bay no such opportunity, but it seems to me impossible to conclude that no such opportunities exist in a commercial relationship of such depth, complexity, and longevity. By way of illustration, the 1999 grape purchase agreement requires that the price paid for grapes each year is to be negotiated following each harvest. Shareholders might think that feature alone creates an opportunity for Oyster Bay to add value, merely by adopting a more aggressive negotiating stance and arbitrating the price under clause 12 if agreement cannot be reached. The agreements must also create many opportunities for disagreement about management of the vineyards and Oyster Bay’s business: should Oyster Bay succeed in several successive arbitrations under the 1999 Vineyard Management and Administration Agreement, it would acquire a right to terminate. A right to terminate also arises under the agreements in the event of a change of control of Delegat’s. And as a matter of simple commercial reality, it would be worth something to Delegat’s to secure a harmonious relationship with a newly independent Oyster Bay.
[57] Should Delegat’s obtain control, by contrast, there is an opportunity for further value capture, a factor that would be of relevance to shareholders since the offer was a partial one in which Delegat’s sought to lift its holding from 32.58% to just over 50%. As Mr Dobson emphasised, the value of underlying vineyards was
characterised in the 1999 prospectus as a key feature of an investment in Oyster Bay. Despite dramatic increases in the value of such land in Marlborough in recent years, Oyster Bay has reported declining vineyard asset values in its recent financial statements. There is also some force in Mr Dobson’s submission that some shareholders may simply feel differently about helping Delegat’s increase its control when, since promoting Oyster Bay, Delegat’s has managed both sides of contracts that have resulted in a value transfer of some $45 million to itself, at the expense of Oyster Bay.
[58] It is true, as Mr Fardell pointed out, that Ferrier Hodgson noted the possibility of a marginal increase in Oyster Bay’s performance resulting from the greater commercial tension that Yealands’ control could introduce. But without knowledge of the extent of the value captured by Delegat’s, shareholders could not evaluate that prediction. Mr Fardell also pointed out that Yealands needed many more shares than did Delegat’s; had Yealands succeeded in its offer at $4.00, only 25% of Oyster Bay’s shares would remain in the hands of shareholders other than Delegat’s and Yealands. But that must be weighed against the potential for further value capture should Delegat’s obtain control, in which case a little less than 50% of Oyster Bay’s shareholding would remain in the hands of other shareholders.
[59] I do not think it matters that Yealands and Mr Rankin accepted the Delegat’s offer; accordingly, the Panel did not err by attaching little if any weight to this consideration. Acceptance was a rational step following Delegat’s announcement of
9 August, if one assumes that under Delegat’s control Oyster Bay is unlikely to realise any part of the unencumbered land value for the benefit of shareholders.
[60] Nor do I consider that the Delegat’s invitation to accepting shareholders to notify it of their desire to complete the sale of their shares will assist the Court in its deliberations. The point of the invitation is that Delegat’s hopes to show that shareholders need not be given a chance to reconsider on the Panel’s terms. But shareholders should be fully informed before making such an election, and the covering letter failed to record in a detailed and neutral way the Panel’s reasons for finding that the vineyard values might be material to shareholders.
[61] The consequence of this finding is that the first three causes of action must fail.
Whether Takeovers Panel may restrain Delegat’s following an omission in
Oyster Bay’s Target Company Statement?
[62] Mr Keene did not pursue the pleading that the Panel lacked jurisdiction to issue a restraining order against Delegat’s, but he argued that the fact that Oyster Bay rather than Delegat’s is said to have breached the Code was a relevant consideration to which the Panel attached insufficient weight.
[63] The Panel’s enforcement jurisdiction is to be found in sections 32-33 of the
Takeovers Act:
32 Panel’s powers in respect of compliance with takeovers code
(1)The Panel may at any time, if it considers that a person may not have acted or may not be acting or may intend not to act in compliance with the takeovers code, after giving that person such written notice of the meeting as the Panel considers appropriate in the circumstances, but in no case exceeding 7 days, hold a meeting for the purpose of determining whether to exercise its powers under this section.
(2)Where the Panel gives a notice under subsection (1) of this section, it may make a restraining order that is expressed to expire with the close of the second day after the date for which the meeting was convened.
(3) Following the meeting specified in subsection (1) of this section, the Panel may make a determination—
(a) That it is satisfied that the person has acted or is acting or intends to act in compliance with the takeovers code; or
(b) That it is not satisfied that the person has acted or is acting or intends to act in compliance with the takeovers code.
(4)Where the Panel makes a determination on reasonable grounds under subsection (3)(b) of this section, the Panel may, at any time before the close of the second day after the date for which the meeting was convened,—
(a)Make a restraining order (relating to the non- compliance with the takeovers code) that is expressed to expire with the close of such day as shall be specified in the order, not being a day that is later than 21 days after the date on which the restraining order is made:
(b)Make an order continuing any restraining order (relating to the non-compliance with the takeovers code) made under subsection (2) of this section until the close of such day as may be specified in the order, not being a day that is later than 21 days after the date on which the restraining order is made.
(5)A restraining order made under this section may be made on any terms and conditions that the Panel thinks fit.
(6) The Panel may vary the restraining order in the same way as it may be made under this section.
(7)The Panel may revoke the restraining order or suspend the restraining order on the terms and conditions it thinks fit.]
33 Restraining orders
For the purposes of section 32 of this Act, a restraining order is an order for one or more of the following:
(a)Restraining a person from acquiring securities in the specified company concerned or any interest in or rights relating to such securities:
(b)Restraining a person from disposing of securities in the specified company concerned or any interest in or rights relating to such securities:
(c) Restraining a person from exercising the right to vote attaching to securities in the specified company concerned or any other right relating to such securities:
(d)Restraining a person from taking any action that is or that may reasonably be expected to constitute a contravention of the takeovers code:
(e)Directing the specified company concerned not to make any payments in respect of any securities:
(f)Directing the specified company concerned not to register the transfer or transmission of any securities:
(g) Directing the specified company concerned not to issue or allot securities to any person:
(h)For the purpose of securing compliance with any such order, an order directing a person to do or refrain from doing a specified act.
[64] The important point for present purposes is that a restraining order may extend to restraining a person from acquiring shares in the specified company. Such an order may be made where the Panel has determined under s32(3)(b) that it is not satisfied that a person has complied or is complying with the Code or intends to do so. Section 32(4) does not limit the jurisdiction to make an order restraining a person from acquiring shares to acquisitions by the person who was the subject of the determination under s32(3)(b). That is only to be expected. An offer may require a number of persons to comply with the Code, and a breach by any one of them may affect the offer in ways that require the Panel to intervene in the interests of shareholders.
[65] This conclusion is confirmed by the Court’s jurisdiction under sections 34-
36. The Court may make orders under s36 if satisfied on reasonable grounds that a person is not acting or intends not to act in compliance with the Code. Section 36 does not limit the orders to those necessary to remedy any breaches by the person who has failed to comply with the Code.
[66] In an affidavit, Mr Yealands also argued that it is not entirely accurate to say that Delegat’s shares no responsibility for the Target Company Statement. Mr Jim Delegat and Ms Pears signed a certificate to the effect that they believed the information contained in the statement was in all respects true and correct and not misleading. However, I discount that evidence. Mr Keene pointed out that they signed the certificate in their capacity as officers of Oyster Bay.
[67] I conclude that the Panel had jurisdiction to restrain Delegat’s from acquiring shares under its offer notwithstanding that it was Oyster Bay that failed to include material information in the Target Company Statement. I accept Mr Keene’s point that the fact that it was Oyster Bay that had breached the Code was a relevant consideration, but the Panel took it into account.
[68] The fourth cause of action fails.
Is it too late for the Panel to intervene?
[69] Delegat’s pleaded that as of 19 September it was contractually bound to complete the offer. In consequence, it is said, Delegat’s owned the shares in equity before the restraining orders of 22 September were issued. All the shareholders now have is a legal right to payment. That being so, it is too late to make orders the effect of which would be to preclude Delegat’s from paying for the shares and perfecting their transfer to Delegat’s.
[70] However, the Act envisages that a restraining order may take effect after the offeror has become contractually bound to acquire the shares. Section 33 provides that an order may restrain a person from ‘acquiring’ shares. The word ‘acquiring’ is obviously capable of referring to acquisition of a beneficial interest, but it is equally capable of referring to acquisition of a legal interest. I see no reason to restrict it to the former, if only because the section also provides that the specified company may be restrained from registering transfers. And s36 allows the Court to make orders declaring an agreement for the acquisition of shares void or voidable. These provisions are not consistent with a legislative intention to confine the Panel’s and the Court’s remedial jurisdiction to cases in which the offerer has yet to assume a contractual obligation to complete the purchase of shares.
[71] Nor does it appear that the Panel overlooked Delegat’s contractual obligations to offerees. Its orders were intended to permit a short-term resolution that would allow Delegat’s to complete its offer.
[72] Mr Keene argued that, whatever the position under the Code, Delegat’s had no choice but to press on as a matter of contract. The offer was not subject to any condition under which Delegat’s could escape liability in contract, once the offer had closed in accordance with its terms. But he accepted until the offer closed on 19
September Delegat’s could withdraw it, notwithstanding that it had received acceptances in respect of the required number of shares.
[73] In the end, Delegat’s argument came down to the proposition that the Panel
(or the Court) could not reasonably place it in a position where it was contractually
obliged to pay shareholders but unable to do so or to have transfers registered. I reject that submission. To the extent this consequence cannot now be averted, it must be said that Delegat’s brought it upon itself. It was common ground that it could have applied, before its offer closed on 19 September, for approval of a variation under which its offer would be extended, although that may have required an exemption from Rule 29, which requires that an extension must be sought more than 14 days before the offer closes. Delegat’s was subject to interim restraining orders at the time, so was plainly aware of the risk it was assuming by pressing on to complete its offer. It is a reasonable inference that Delegat’s considered the risk was an acceptable one. A letter of 29 September from its solicitors suggests Delegat’s was concerned that the Panel’s intervention might give Yealands the opportunity to thwart its offer through what were described as spoiling tactics.
[74] The fifth cause of action fails.
The Takeover Panel’s application for interim restraining orders
[75] The interim orders that the Panel seeks are:
As against Delegat’s:
1.restraining it from, or doing any act for the purpose of, acquiring any securities in Oyster Bay, or any interest in or rights relating, whether directly or indirectly, to any such securities pursuant to section
36(1)(m) of the Act.
As against Oyster Bay:
2. directing that it not register the transfer or transmission of any securities arising from first defendant’s partial takeover offer dated 7
July 2005, pursuant to section 36(1) of the Act.
[76] Section 36 provides relevantly:
36 Orders
(1)The Court may, on an application under section 34 of this Act, make, in relation to the specified company concerned and any securities in the specified company, any of the following orders:
…
(c)An order directing the specified company not to register the transfer or transmission of all or any of such securities:
…
(m) An order restraining a person from, or doing any act for the purpose of, acquiring any such securities, or any interest in or rights relating, whether directly or indirectly, to any such securities:
[77] The Court must be satisfied on reasonable grounds that a person has not acted or is not acting or intends not to act in compliance with the Code: s34. In this case, the Panel points to Oyster Bay’s failure to include the encumbered and unencumbered values of the vineyards. I have concluded above that the Panel was entitled to conclude that such information might reasonably be expected to be material to shareholders. For the same reasons, I am satisfied that Oyster Bay has failed to comply with R46 of the Code and that the interim orders that the Panel seeks should be granted.
Result
[78] The application for judicial review is dismissed. There will be interim orders in terms of the Panel’s application.
Costs
[79] [Discussion with counsel]. Costs will be reserved.
[80] Mr Keene moves for an order varying the Delegat’s offer by extending the settlement date. I do not think it is necessary to make such an order today. Delegat’s may make an application under s36.
F Miller J
Solicitors:
S Joyce, Jones Young, Auckland for Delegat’s Wine Estate Limited
M O’Brien, Bell Gully, Wellington for The Takeovers Panel
N Scott, Kensington Swan, Auckland for Oyster Bay Marlborough Vineyards Limited
M J Radich, Radich Dwyer, Blenheim for Peter Yealands Investments Limited
P McRae, Chapman Tripp, Wellington for D H Rankin
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