MetLifeCare Limited
[2020] NZHC 2752
•20 October 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-629
[2020] NZHC 2752
In the matter of a scheme of arrangement under part 15 of the Companies Act 1993 AND
METLIFECARE LIMITED
Applicant
Hearing: 20 October 2020 Appearances:
M D Arthur and L Bercovitch for Applicant
J Q Wilson for Asia Pacific Village Group Ltd T Lindsay for ResIL Investments Ltd
A S Ross QC and M Cunliffe for Takeovers Panel
Judgment:
20 October 2020
JUDGMENT OF LANG J
[on application for orders under Part 15 of the Companies Act 1993]
This judgment was delivered by me on 20 October 2020 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date……………
Solicitors/Counsel:
Chapman Tripp, Auckland Bell Gully, Auckland Lindsay LA, Auckland
M Cunliffe, Wellington A S Ross QC, Auckland
Re METLIFECARE LTD [2020] NZHC 2752 [20 October 2020]
[1] The applicant, Metlifecare Limited (Metlifecare), is a publicly listed company. It seeks an order under s 236 of the Companies Act 1993 (the Act) approving a scheme of arrangement. The scheme involves Asia Pacific Village Group Limited (Asia Pacific) acquiring all the shares in Metlifecare for the sum of $6 per share.
[2] Asia Pacific supports the application. Until late yesterday afternoon it was opposed by one of Metlifecare’s shareholders, ResIL Ltd (ResIL). That company owns 1,000 shares in Metlifecare and 7,000 retail bonds issued by Metlifecare. The sole shareholder and director of ResIL is Mr Craig Priscott, a lawyer and accountant who has considerable experience in commercial investment. Mr Priscott initially acquired the shares and bonds after the proposed scheme was announced and then transferred them to ResIL on 3 September 2020.
[3] ResIL objected to the scheme being approved because Mr Priscott considered the information Metlifecare provided to its shareholders in a Scheme Booklet was inadequate and/or misleading and incorrect. He therefore said the shareholders were unable to make an informed decision as to whether and how they should vote on a resolution proposing that shareholders approve the scheme. He also contended the scheme is not one that an intelligent and honest business person would agree to. Finally, he said the scheme will materially prejudice ResIL’s position as the owner of bonds issued by Metlifecare.
[4] ResIL ultimately withdrew its opposition to the scheme after the Takeovers Panel announced on 19 October 2020 that it proposed to issue a letter indicating that it had no objection to the orders being made under s 236 of the Act (the “no-objection” statement).
Background
[5] This is not the first occasion on which Asia Pacific has sought to acquire the shares in Metlifecare. On 29 December 2019 Metlifecare and Asia Pacific entered into a scheme implementation agreement (the earlier SIA) under which Asia Pacific agreed to acquire all the shares in Metlifecare for the sum of $7.00 per share. No issues arose under that SIA until New Zealand encountered the COVID-19 pandemic in March 2020.
[6] The SIA permitted Asia Pacific to terminate the agreement by notice in writing if a Material Adverse Change (as defined) or a Prescribed Occurrence (as defined) occurred before the arrangement was implemented. On 28 April 2020 Asia Pacific served Metlifecare with a notice terminating the SIA. Asia Pacific relied on two grounds to terminate the agreement. First, it alleged that the emergence and spread of COVID-19 in New Zealand constituted a Material Adverse Change under the SIA because it had reduced, or was reasonably likely to reduce, Metlifecare’s consolidated net tangible assets and underlying net profit. Secondly, it alleged several acts by Metlifecare constituted Prescribed Occurrences under the SIA.
[7] Metlifecare did not accept Asia Pacific had validly terminated the earlier SIA. It affirmed the agreement by issuing proceedings in this Court seeking a declaration that the SIA remained in force and orders requiring Asia Pacific and those standing behind it to perform their obligations under the SIA.
[8] In July 2020, whilst that litigation was still in its early stages, Asia Pacific approached Metlifecare with a new indicative non-binding offer under which it proposed to acquire the shares for the reduced price of $6 per share. Metlifecare’s directors then took steps to obtain the views of institutional shareholders who held significant parcels of shares in the company. Many, but not all, indicated they were likely to support the new offer. This resulted in the Board concluding the revised offer should be put to shareholders for their consideration.
[9] The Board then entered into a new SIA with Asia Pacific under which it agreed to place a new scheme of arrangement before shareholders involving the sale of all Metlifecare’s shares to Asia Pacific for the sum of $6 per share. As a condition of entering into the second SIA Metlifecare agreed to settle the litigation relating to the earlier SIA. In compliance with this condition Metlifecare then discontinued the proceeding it had filed against Asia Pacific. It also obtained directions from the Court regarding the steps it needed to arrange a meeting of shareholders to consider the new offer.
[10] In accordance with the Court’s directions Metlifecare convened a shareholders’ meeting on 2 October 2020 so that shareholders could consider and vote on a
resolution that the company should proceed with the new SIA. Prior to the meeting the company provided shareholders with a Scheme Booklet containing information about the scheme. This included an Independent Advisors Report (IAR) prepared by Calibre Partners, a consultancy company based in Auckland. That firm had prepared a similar report in relation to the earlier scheme.1 As it had done with the earlier scheme, the IAR placed the value of Metlifecare’s shares as at 30 June 2020 in the range between $5.80 and $6.90 per share.
[11] In order for the resolution to be carried a simple majority of shareholders present at the meeting needed to vote in favour of it. In addition, shareholders holding at least 75 per cent of all shares for which votes were cast needed to be in favour of it. A significant number of shareholders attended the meeting in person, by proxy and online. A clear majority in number of those attending the meeting voted in favour of the resolution. 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.
[12] The voting results prompted Metlifecare to seek the Court’s approval of the scheme.
Relevant principles
[13]Section 236 of the Act relevantly provides as follows:
236 Approval of arrangements, amalgamations, and compromises
(1) Notwithstanding the provisions of this Act or the constitution of a company, the Court may, on the application of a company or any shareholder or creditor of a company, order that an arrangement or amalgamation or compromise shall be binding on the company and on such other persons or classes of persons as the Court may specify and any such order may be made on such terms and conditions as the Court thinks fit.
(2) …
[14] The Act does not prescribe any specific criteria by which schemes such as the present are to be approved. Rather, the Court has a broad discretion limited only by
1 When it was trading under the name KordaMentha.
the policy and purposes of the Act.2 In broad terms, however, the courts have generally had regard to the following matters:3
(a)Whether there is compliance with the relevant statutory provisions;
(b)Whether the company has fairly put the scheme to the class or classes of shareholders affected by the proposal;
(c)Whether those classes were fairly represented by those who attended the meeting;
(d)Whether those who attended the meeting acted bona fide and without coercion;
(e)Whether the arrangement is such that an intelligent and honest business person might reasonably approve it;
(f)In cases where there are competing interests, the Court must also be satisfied the scheme is fair and equitable.
[15] ResIL relied in particular on the following passage from Weatherston v Waltus Property Investments Ltd:4
In the exercise of its discretion to approve in [the context of competing interests] the Court should weigh the interests of the applicants, and any special majority supporting them, against the interests of any dissentient minority. The policy of the Act is not only that an appropriate majority should be able to reconstruct and give fresh direction to the activities of a company, but also that a minority should be protected from that degree of change to which it is unreasonable to require all shareholders to submit. In particular the Court should guard against any perception that the size of majority support for a proposal of itself should dictate the outcome of an application under s 236 as the Court is as much the guardian of the minority’s interests as it is that of the majority. Both must receive the fullest consideration.
(emphasis added)
2 Weatherston v Waltus Property Investments Ltd [2001] 2 NZLR 103 (CA) at [32].
3 Re CM Banks Ltd [1944] NZLR 248 (SC) at 252; Re Nuplex Ltd [2016] NZHC 1677; and Re Fliway Group Ltd [2017] NZHC 3216.
4 Weatherston v Waltus Property Investments Ltd, above n 2, at [36].
[16] Other than the adequacy of the material provided to shareholders in the Scheme Booklet there has been no dispute in the present case that the participants in the transactions have complied with the relevant statutory provisions. All shareholders are in the same class so no issues arise as to differential treatment as between classes of shareholders. Furthermore, no objection has been taken to the manner in which Metlifecare convened the meeting of shareholders or the manner in which votes were cast and/or counted. In addition, Asia Pacific has now obtained consent to the transaction proceeding under the relevant provisions of the Overseas Investment Act 2005. Finally, the Takeovers Panel has issued a “no-objection” statement in relation to the scheme.
[17] Mr Priscott and ResIL expressed concerns as to whether Metlifecare had put the scheme fairly to shareholders and whether the scheme was such that an intelligent and honest business person might reasonably approve it. The latter involves consideration of whether the scheme is fair and equitable as between competing interests.
[18] The fact that ResIL has now withdrawn its opposition does not alter the position so far as the Court is concerned. It has now received a considerable amount of evidence from both ResIL and Metlifecare and it must determine the application in the light of all that material.
Was the scheme fairly put to shareholders?
[19] Mr Priscott contended the Scheme Booklet that was sent to shareholders before the meeting on 2 October 2020 was deficient in several respects. He relied in this context on the following observation by French J (as he then was) in Re HIH Casualty and General Insurance Ltd:5
91. The content of a notice of meeting and documents accompanying it (whether or not called for by statutory provisions) is the means by which persons entitled to attend are enabled not only to form views as to how they may eventually vote but also to decide whether they should take steps to attend at all, whether in person or by proxy. That function of such documents is referred to in the extract from the judgment in Fraser v NRMA Holdings Ltd at paragraph [83] above. The ability to make an informed decision whether to
5 Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485 at [91].
participate by attending (either in person or by proxy) is just as important as the ability to make an informed decision on voting.
(footnote omitted)
[20] In the letter sent to Metlifecare on 19 October 2020 the Takeovers Panel observed that its policy was to issue a no-objection statement in relation to a scheme of arrangement where:
(a)all material information relating to the scheme of arrangement has been disclosed;
(b)the standard of disclosure to all shareholders has been equivalent to the standard that would be required by the Code in a Code-regulated transaction or is otherwise appropriate in all of the relevant circumstances;
(c)the interest classes of shareholders have been adequately identified; and
(d)the other matters referred to in the Guidance Note6 have been addressed, and there are no other reasons for the Panel to object to the scheme or arrangement.
[21] I derive considerable comfort from the fact that the Takeovers Panel has now issued its “no-objection” statement after considering all the material that is currently before the Court. The letter dated 19 October 2020 stated that the Panel gave particular focus to the concerns raised by ResIL. It formed the view that, whether considered individually or in aggregate, these should not prevent the Panel from issuing a no- objection statement in respect of the proposed scheme. The fact that a specialist body such as the Takeovers Panel has independently concluded that Metlifecare provided shareholders with sufficient material to satisfy Takeover Code requirements is obviously a matter of considerable significance in the present context.
The role played by the institutions who indicated early support for the new offer
[22] In an affidavit filed in opposition to the application Mr Priscott said he believes a small number of institutional shareholders placed inappropriate pressure on Metlifecare’s directors to abandon the litigation against Asia Pacific and enter into the new SIA. This issue arises from events that occurred in the weeks following the
6 Takeover Panel, Guidance Note: Schemes of Arrangement and amalgamations under Part 15 of the Companies Act 1993, (9 September 2019).
announcement of the earlier scheme. During this period there were significant changes in the composition of Metlifecare’s institutional shareholder base. Once the scheme had been announced to the NZX and ASX several sophisticated off-shore financial institutions acquired significant parcels of Metlifecare shares, principally from domestic institutions.
[23] Mr Priscott says it is relatively commonplace for such entities to acquire shares in companies that are the subject of a takeover bid that is yet to be completed. Their objective is to earn short term profits representing the difference between the prevailing share price and the final price shareholders will receive when the takeover is eventually completed.7 Several of the institutions that acquired shares in Metlifecare are event-driven hedge funds sometimes referred to as Merger Arbitrage Funds or Risk Arbitrage Funds (Risk Arbs).
[24] The purported termination of the earlier scheme left these institutions in a difficult position. They bought their shares in the expectation that Asia Pacific would acquire them within a short space of time for the sum of $7 per share. They had not anticipated implementation of the scheme would be derailed or delayed due to events flowing from the COVID-19 pandemic. This had not become a global issue when the earlier scheme was announced. Once Asia Pacific purported to terminate the earlier SIA Metlifecare’s share price dropped significantly. It also became evident the company would face a considerable period of uncertainty, possibly lasting for up to two years, whilst the litigation ran its course. This was clearly at odds with the objectives of those shareholders who had acquired shares in anticipation that the earlier scheme would be implemented quickly.
[25] Mr Priscott believes shareholders affected in this way placed significant and inappropriate pressure on Metlifecare’s directors to reopen negotiations with Asia Pacific. This led to Asia Pacific making its revised offer on 20 July 2020 and the directors entering into the new SIA on behalf of the company.
[26] By the time of the meeting on 2 October 2020 three of Metlifecare’s directors supported the scheme whilst the Chairman, Mr Ellis, did not. The fifth director, who
7 Metlifecare shares were trading at prices between $5.85 and $5.90 following the announcement.
was appointed by the NZ Superannuation Fund, abstained from expressing any view citing a conflict of interest. The views of the directors were conveyed to shareholders in the Scheme Booklet issued to all shareholders prior to the meeting on 2 October 2020.
[27] Mr Priscott points out that the Scheme Booklet advised shareholders that the majority of shareholders who had been canvassed informally supported the new scheme. These included the NZ Superannuation Fund, which owned 19.86 per cent of Metlifecare’s shares. The Scheme Booklet did not, however, disclose the identity, character, interests or role played by those shareholders other than the NZ Superannuation Fund who had indicated early support for the scheme. Shareholders therefore 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. Mr Priscott contends 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.
[28] In his written submissions filed before ResIL withdrew its opposition Mr Lindsay articulated ResIL’s concerns as follows:
(v)The Scheme Booklet is also silent as to the role the majority, including, in particular, the Risk Arbs, appeared to play in the formation of the $6 Scheme, namely:
(a)In early July 2020 it appears the directors were under notable pressure from the Risk Arbs to recommend the $6 Scheme (apparently including a motion by the Risk Arbs to remove the Board, or at least Chairman Ellis because he opposed).
(b)This pressure to conclude a new deal was being placed on the Board in the worst possible commercial climate where, because of COVID-19:
(I)there was at the time negative market sentiment, including with respect to house price forecasts – a key value driver for [Metlifecare’s] business;
(II)also because of COVID-19, it was essentially impossible for other competing bids to emerge due to international travel restrictions;
(III)the significant presence of Risk Arbs and other short term offshore financial investors on the share register,
meant APVG knew the register included (potentially substantial) ‘hot money’, eager to exit and accept a new deal, even at a steep discount to the $7 Scheme;
(c)These factors made it more likely that any transaction would favour [Asia Pacific] over [Metlifecare] shareholders. Indeed, the Board’s description at the Scheme Meeting of the few days in early July 2020 when [Asia Pacific] advanced its “take it or leave it” offer conveys a strong impression that [Asia Pacific] held the whip hand.
(vi)However, it was only for the first time at the Scheme Meeting when the Board confirmed (Ellis and Binns) that the “hedge funds” (i.e. the Risk Arbs) played an important role in the Board agreeing to, and the majority directors recommending, the $6 Scheme.
[29] Metlifecare addressed Mr Priscott’s concerns in affidavits filed on its behalf by its Chairman, Mr Kim Ellis, and one of its directors, Mr Mark Binns. Mr Ellis says he received Asia Pacific’s non-binding indicative offer to acquire the shares in Metlifecare for $6 per share on 5 July 2020. One of the terms of the offer was that Metlifecare was required to fully settle the litigation relating to the purported termination of the earlier SIA. On the same date Metlifecare received a letter from the NZ Superannuation Fund. This requested Metlifecare to urgently engage with Asia Pacific with a view to entering into a binding agreement and, in the meantime, to defer a special meeting of shareholders that was about to be held to seek approval from shareholders for continuation of the litigation to enforce the earlier SIA.
[30] After receiving these communications the Board decided to defer, but not cancel, the special meeting of shareholders so it could continue discussions with Asia Pacific. The Board also asked Metlifecare’s financial advisers, Jarden & Co, to seek informal and non-binding feedback on the new offer from Metlifecare’s institutional shareholders. This revealed that foreign investors who held approximately 22.4 per cent of the shares in Metlifecare were in support of the new proposal, whilst domestic institutions representing 1.1 per cent of the shares were opposed to it. Jarden & Co also received indications of further support for the new offer from domestic retail broking firms who directly represented shareholders holding 7.3 per cent of shares in the company.
[31] At some stage during this period the NZ Superannuation Fund entered into a voting deed with Asia Pacific under which it committed itself to vote in favour of any
resolution that the company accept the new proposal. This was announced to the market on 10 July 2020.
[32] Mr Ellis says the feedback the Board received from institutional shareholders persuaded it to enter into the new SIA and thereby discontinue the existing litigation. The Board was unanimous was that the new proposal should be put to shareholders. One of the factors in this decision was that, by entering into the voting deed with Asia Pacific, the NZ Superannuation Fund had effectively restricted the Board’s ability to negotiate a higher offer from Asia Pacific.
[33] Mr Ellis acknowledges the Board came under pressure to enter into the replacement transaction with Asia Pacific from at least one hedge fund shareholder. These issues also found their way into the news media. Mr Ellis is adamant, however, that the hedge funds did not force the Board to enter into the new SIA. Rather, the directors unanimously considered it was in the interests of shareholders to consider the new proposal and made the decision to enter into the new SIA for that reason.
[34]Mr Binns confirms Mr Ellis’s version of events. He deposes:
5In particular, Mr Priscott asserts that the majority directors did not exercise their own judgment as to what was best for the company, and shareholders as a whole, when we were considering the $6 settlement offer from [Asia Pacific].
6As one of the majority directors, I strongly disagree. As Mr Ellis has stated, the Board deliberations on settlement of the litigation and whether to recommend the replacement scheme were very considered, with directors acting in good faith and in the best interests of the company after taking external financial and legal advice.
7The views of shareholders were of course an important factor taken into account when considering whether to accept the settlement proposal, but so were a number of other factors such as litigation uncertainty, delay, and disruption, together with the adequacy of the
$6 offer. I believe that the Board considered all relevant material matters and acted appropriately and in accordance with its duties.
8The majority directors’ views as to terminating the SIA litigation and recommending the Scheme were accurately described in the Scheme Booklet. The background to the recommendations was explained on page 7 of the Scheme Booklet and the majority director recommendation was explained on page 8. As set out, the indicated support of shareholders with a majority of the shares was one of the reasons for the recommendations to shareholders to approve the
scheme. The other listed factors were also important. As noted, the
$6 consideration was within the range and I considered reasonable in all of the circumstances.
[35] The issue of whether the Board ought to have entered into the new SIA and in so doing abandoned the litigation against Asia Pacific is not relevant for present purposes. That had already occurred by the time Metlifecare sent out the Scheme Booklet to shareholders in anticipation of the meeting to be held on 2 October 2020. Mr Priscott’s concern is based on his view that the Scheme Booklet should have identified the institutions who had already indicated support for the new offer and also advised shareholders of their likely motivation for doing so.
[36] I do not accept that the Scheme Booklet should have contained 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. As Mr Arthur points out on Metlifecare’s behalf, in any publicly listed company the aims and aspirations of shareholders will inevitably differ. Some will acquire shares with a view to realising capital gains and/or dividends over time whilst others will hope to sell within the short to medium term. The respective positions of these two groups may be irreconcilable where, as here, an offer is made for the acquisition of all the shares in a company for a cash consideration.
[37] Metlifecare’s shareholders therefore needed to consider their own positions when deciding whether to vote in favour or against the resolution. They did not need to know the identity of the institutional shareholders who had already indicated their support for the scheme or why those shareholders held that view. If individual shareholders were interested in those issues they were free to attend the meeting and to ask questions about them.
Abstention by the director appointed by the NZ Superannuation Fund
[38] ResIL criticised the fact that the Scheme Booklet did not contain any information about why Ms Carolyn Steele, the director appointed by the NZ Superannuation Fund, had seen fit to abstain from joining in the directors’ recommendation as to whether shareholders should support the scheme. It suggests this was a material omission. This ignores the fact that the Scheme Booklet explained
that Ms Steele had abstained because she considered she was in a position of conflict given the fact that the NZ Superannuation Fund had already publicly endorsed the scheme. I do not consider there is anything in this point.
The methodology used in assessing the range of values for Metlifecare shares
[39] ResIL has produced a report prepared by Campbell MacPherson, a firm that provides its corporate clients with advisory services including share valuations and advice on mergers and acquisitions. The report criticises numerous aspects of the methodology used by Calibre Partners in assessing the range of values within which Metlifecare’s shares lay as at 30 June 2020. The criticisms are highly technical but are broadly directed to support ResIL’s submission that Calibre Partners’ share valuation was too low.
[40] Calibre Partners has responded to these criticisms in an affidavit provided by Mr Grant Graham. For convenience I reproduce the following table in Mr Graham’s affidavit that summarises the criticisms contained in the Campbell MacPherson report and his responses to them:
Primary Criticism Summary Responses The IAR valuation was out of date because it
failed to take account of events after the valuation date.
In fact, subsequent events were taken into account in the valuation. The IAR should have included more up to date HPI [house price increase] forecasts, which could have increased Metlifecare’s cash flow forecasts. Campbell McPherson’s interpretation is selective and HPI forecasts are subjective – Calibre Partners took into account available information and explained the impact of variability in forecasts in the sensitivity
analysis in the IAR.
The IAR did not disclose a significant reduction in government bond yields, and did not capture
this through adjustment to the risk-free rates.
The IAR quoted the rates used, and the change was immaterial, affecting price at the low end
of the valuation by approximately 2%.
Assuming nil debt for Metlifecare had a negative impact on value. This is fundamentally incorrect. If the assessment of weighted average cost of capital had included debt, this would have lowered (not increased) the assessed valuation range. The IAR may overstate Metlifecare’s risk profile. I do not consider that the IAR overstated Metlifecare’s risk profile. The assessment was equivalent to adopting a blended asset beta that was reasonable compared to those of
comparable companies.
Calibre Partners changed its approach to assessing the terminal value as compared to the
previous IAR [in relation to the earlier offer by Asia Pacific].
Calibre Partners used the same approach in each IAR. The minor change mentioned has a
small impact on value of roughly one cent per share.
The IAR did not adequately disclose changes to its data, basis and assumptions in calculating
Metlifecare’s underlying earnings (or why such a change was made)
This was not required. Each IAR is a standalone document. Our approach was set
out in both IAR’s, and any shareholder who did want to understand the changes could do so.
The IAR failed to disclose the impact of including or excluding the wage subsidy in Metlifecare’s FY20 underlying earnings. Calibre Partners appropriately estimated underlying earnings based on a range of data. In any event, the IAR clearly shows the level of earnings we adopted and the earnings in prior years (both including and excluding wage subsidies). The increase in the valuation multiple applied between the valuation dates was less than the
increase in multiple for comparable companies.
MacPherson assumes a degree of precision that in practice is overly prescriptive. The
difference is minor: 1.6%.
The IAR placed reliance on the CBRE property valuations (for the adjusted net asset valuation crosscheck) without stating the underlying assumptions adopted by CBRE. Reliance on the CBRE valuation was used as a broad cross-check and was not the primary valuation methodology. It would be unusual to list all of CBRE’s assumptions, as can be seen
in other Rule 21 independent adviser’s reports for property companies.
Calibre Partner’s valuation range for Metlifecare did not change between each of its independent adviser’s reports, which is inconsistent with the increase in the market value over the same period. The valuation range reflected the information available to Calibre Partners when preparing the IAR. We also specifically advised shareholders that they should consider share price movements after 25 August 2020.
[41] I do not consider it helpful to analyse these issues for several reasons. First, any attempt to reach a firm view on the competing arguments without the benefit of cross-examination would be futile. Secondly, the information contained in the table makes it clear that all of the issues are at least contestable and that any difference in ultimate outcome if the criticisms are valid is likely to be minor.
[42] Thirdly, I consider some of the points raised by Campbell MacPherson would require the IAR 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. One example is the complaint made about the failure of the Calibre Partners report to set out the assumptions underlying the most recent valuation of Metlifecare’s units by CBRE. It is highly unlikely in my view that shareholders would have any interest in knowing these, particularly given the fact that the CBRE valuations were only used as a form of cross-check. The principal methodology used was that of discounted cashflow (DCF).
[43] Fourthly, given the number and breadth of the complaints made about Calibre Partners’ methodology one would expect the Campbell MacPherson report to conclude that the Calibre Partners report significantly undervalued Metlifecare shares. This is
not the case. Nor does the Campbell MacPherson report suggest an alternative range of values for Metlifecare shares as at 30 June 2020. Rather, it concludes with the following statement:
New valuation of [Metlifecare]
In our opinion, if the Valuation of [Metlifecare] was redone using the same methodology, but based on the most recent and relevant economic data and forecasts (e.g. as at say 30 September 2020), the assessed valuation range could be higher than Calibre Partners’ assessed valuation range as at 30 June 2020.
I consider this to be a surprisingly benign conclusion. Implicit within it is a concession that the share value as at 30 June 2020 may in fact have been within the range identified by Calibre Partners in the IAR.
[44] Finally, it is significant that the range of values identified in the second IAR was identical to that contained in the IAR 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. This was despite the fact that, on Calibre Partners’ analysis, the underlying value of the shares had not altered notwithstanding any issues created by the COVID-19 pandemic. The fact that more than 90 per cent of shares were nevertheless voted in favour of the lower offer suggests that a slightly higher valuation is unlikely to have made any difference. Shareholders knew they were being offered a “take it or leave it” deal and they elected to take it.
[45] Overall I consider the Scheme Booklet fairly put the offer to shareholders and that any deficiencies in the IAR are unlikely to have affected the view shareholders took of the scheme.
Was the scheme one that an honest and intelligent business person could support?
[46] As I have already observed, the scheme must be one that an intelligent and honest business person acting in respect of his or her own interests might reasonably
approve. Where there are competing interests, the Court must also consider whether the scheme is fair and equitable.8
[47] Mr Priscott says he would have preferred the directors to continue with the litigation against Asia Pacific but this option was no longer available by the time of the shareholders meeting on 2 October 2020. It had in fact gone by the time he purchased his shares. Furthermore, I accept Mr Ellis’s evidence that the directors were left in a poor negotiating position once the NZ Superannuation Fund entered into the voting deed with Asia Pacific.
[48] Not surprisingly, Mr Priscott does not question the honesty of any of the shareholders who voted in favour of the scheme. Nor does he suggest the directors and/or shareholders who supported the scheme acted inappropriately or in a coercive manner towards shareholders who either did not support the scheme or were undecided.
[49] The institutional shareholders who formed part of the majority were undoubtedly motivated to sell their shares by the circumstances in which they found themselves after Asia Pacific purported to terminate the earlier SIA. This does not, however, call into question their right to act in what they perceived to be their own best interests. The institutional shareholders had the same rights as other shareholders. The test applied by the Court proceeds on the basis that all shareholders are entitled to vote in a manner that they consider to be in their own best interests.
[50] Mr Priscott points out that only 69.9 per cent of all shares in Metlifecare were ultimately voted in favour of the scheme. This is significantly lower than the threshold of 90 per cent that would have been required if Asia Pacific had wished to proceed to full acquisition of shares in the company under the Takeovers Code. I accept this argument as far as it goes but I do not see it as advancing ResIL’s case materially because the procedure for schemes of arrangement under Part 15 of the Act prescribes its own thresholds.
8 Weatherston v Waltus Property Investments Ltd, above n 2, at [35]-[36].
[51] ResIL’s real complaint was that the price of $6 per share amounts to a “lowball offer” that no intelligent business person would accept. It also pointed out that the present scheme attracted less support from shareholders than was the case in six other acquisition schemes between 2016 and 2019.9 In those cases the votes cast in support of the proposed scheme ranged between 99.3 per cent and 93.8 per cent.
[52] This submission needs to be viewed in light of the fact that the schemes to which ResIL refers did not have the unfortunate background that this one possessed. By the time shareholders came to consider the current offer they were in possession of several pieces of information that were likely to have affected their view of the current scheme. The most obvious of these is the fact that Asia Pacific had been prepared to pay $7 per share just a few months earlier. Shareholders would have been entitled to wonder why the current offer was at such a reduced price when the IAR indicated the value of the company’s shares fell within the same range as it lay at the time of the earlier offer. It is therefore not surprising some shareholders may have had reservations about the level of the current offer.
[53] The Scheme Booklet also advised shareholders that Mr Ellis was not in favour of the scheme and that it only enjoyed the support of three of the five directors. Furthermore, those directors did not provide an unqualified recommendation in favour of the scheme. The Scheme Booklet recorded that the three directors who supported the scheme acknowledged that they had faced a “difficult and finely balanced decision”. The division of views within the directors may also have influenced the manner in which shareholders approached the scheme.
[54] In addition, the Shareholders Association had distributed a circular to its members on 17 September 2020 pointing out shortcomings and disadvantages that it considered the scheme held for Metlifecare shareholders. The circular advised members that the Association proposed to vote the undirected proxies entrusted to it against the resolution.
9 Westland Co-operative Dairy Co Ltd (93.8%), Trade Me Ltd (99.3%), Methven Ltd (98.0%), Trilogy Ltd (99.1%), Fliway Group Ltd (99.1%) and Nuplex Ltd (98.1%).
[55] Given all that had gone before I consider the fact that more than 90 per cent of votes were cast in favour of the scheme to be a strong endorsement by shareholders. It clearly suggests the scheme was broadly supported by shareholders who attended the meeting notwithstanding the events of the previous months. It also needs to be borne in mind that many, if not all, of the institutional shareholders who voted in favour of the scheme were obviously sophisticated and intelligent investors. They would have been acutely aware of the background and nevertheless voted in favour of the scheme.
[56] Several other factors also suggest the scheme was one that an intelligent business person could reasonably support. First, the offer of $6 per share was within the valuation range assessed by Calibre Partners in the IAR, albeit at the lower end of that range. Secondly, the offer represented a premium of 14.9 per cent over the price Metlifecare’s shares were trading at immediately before Asia Pacific’s new offer was announced. This compares favourably with the premium of 13 per cent received by shareholders in Re Fliway Group Ltd.10
[57] The sale price of $6 per share also represents a 26.3 per cent premium on Metlifecare’s one-month volume weighted average price (VWAP) of $4.75 for the month ending on 3 July 2020. In addition, it represents a 46.7 per cent premium on Metlifecare’s three-month VWAP of $4.09 for the period ending on the same date. Finally, it represents an 18.1 per cent premium to the share price of $5.08 immediately prior to the announcement of Asia Pacific’s initial unsolicited non-binding preliminary expression of interest to acquire Metlifecare on 19 November 2019
[58] ResIL pointed out that the premium achieved on the sale to Asia Pacific is less than that achieved by shareholders in several other companies that have been subject to takeover bids and I accept that this is so. I nevertheless consider the overall premium achieved is nevertheless likely to have been attractive to many Metlifecare shareholders.
[59] 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
10 Re Fliway Group Ltd, above n 2.
to medium term. It is likely that it would have fallen at least to where it stood prior to the announcement of Asia Pacific’s current offer. The price could easily have fallen lower than that because the institutions who bought parcels of shares after the announcement in July 2020 may well have sold them immediately once it became clear the new scheme was not going to proceed.
[60] Finally, two factors suggest ResIL and Mr Priscott do not speak for a significant proportion of Metlifecare’s shareholders. ResIL is the owner of a very small parcel of shares that it bought well after Asia Pacific’s offer had already been announced. It was therefore fully aware that the shares were likely to be acquired by Asia Pacific. This means ResIL cannot claim to represent the interests of long term shareholders.
[61] This leads to the second point, which is that ResIL’s opposition to the present application did not act as a catalyst for other shareholders who did not vote against the scheme at the meeting to voice their opposition to the scheme. The New Zealand Shareholders Association has filed an affidavit in opposition to the application but it voted the shares it was entrusted with against the scheme at the meeting. There is no evidence that shareholders who did not attend or vote at the meeting on 2 October 2020 now support ResIL’s opposition to the scheme.
[62] Shareholders in Metlifecare were obviously entitled to feel disappointed that they were not going to realise the premium available under Asia Pacific’s earlier offer. Some would also undoubtedly have shared Mr Priscott’s view that the directors should have pursued the litigation against Asia Pacific notwithstanding the delay and continued uncertainty it involved. Taking all relevant factors into account, however, I consider the scheme was one that an intelligent business person could reasonably support. Those factors also mean it is fair and equitable that the scheme be permitted to proceed.
ResIL’s concerns as a bondholder
[63] Mr Priscott deposes that the bonds ResIL acquired on 3 September 2020 bear interest at the rate of 3 per cent per annum and will mature on 30 September 2026. They rank equally with Metlifecare’s bank debt but behind security interests totalling approximately $1.5 billion.
[64] Mr Priscott believes there are significant risks for bond holders if the scheme is permitted to proceed. He has no confidence Metlifecare’s directors took this factor into account when they entered into the SIA.
[65]Mr Priscott identified these risks in the following table:
Current situation for bondholders If $6 Scheme is implemented [Metlifecare] share price provides an ‘early warning system’ for bondholders [Metlifecare] shares de-listed from NZX so this benefit disappears With listed shares, [Metlifecare] has good access to additional
capital should it be required
Without listed equity securities, [Metlifecare’s] access to new
capital (in case of financial problems) is largely reliant on
equity from EQT funds and/or its associates. However EQT’sInfrastructure IV Fund is 80-85%
invested, so additional capacity for [Metlifecare] may be complicated
Listed companies tend to have more conservative gearing levels. For MET, the 2020 Annual Report showed a gearing ratio of 17%,
despite the LVR covenant of 50%.
Private equity funds use debt to drive equity returns. In its 10 July 2020 press release, EQT noted that [Metlifecare’s] ‘growth pipeline will be accelerated by EQT’s support’. Indeed, clause 9.5(b) of the SIA anticipates the possibility that the business is refinanced by EQT, potentially resulting in significantly higher levels of
gearing, and additional risk for bondholders. Increasing
[Metlifecare’s] LVR from 15% to 50% would significantly increase risk for bondholders
Listed status of [Metlifecare] shares means all NZX Listing Rules apply (including rules governing Related Party Transactions, Corporate
Governance Code, etc)
Unlisted status means many of the more restrictive Rules pertaining to listed equities fall away, leaving more permissive Rules applying to borrowers only having debt
securities
Liquidity of bonds benefits from higher information disclosure as a result of having listed equities (i.e.
keeps [Metlifecare] in the public eye)
Liquidity will decline further from lack of regular information Some investors will have bought
the bonds because the equities were listed
These investors may need to sell
the bonds, reducing overall demand
Current NZ-based directors provide bondholders with comfort because they are perceived to have greater
commitment to their reputations, therefore more conservative
Clause 6.3 of the SIA anticipates that EQT will dispense with the
current [Metlifecare] directors and appoint its own, in accordance with EQT policy. Given EQT has no office located in NZ, this is likely
to include a number of offshore
individuals with no connection to this country Significant proportion of independent directors No requirement for any independent directors Although the shareholdings of
listed companies can change at any time, it seems likely that
[Metlifecare] bondholders get some measure of comfort from having major shareholders such as The NZ Superannuation Fund, ACC, and
other large NZ fund managers on the register
There is no such comfort to be gained by having foreign private equity ownership, with no
demonstrated commitment to the
country, and no prior investments in NZ
No current concerns about [Metlifecare] abiding by the contractual terms of the bonds EQT has recently attempted to repudiate the Original SIA at $7, raising questions about its
commitment to contractual undertakings
[66] The starting point in this context is that the scheme does not have any legal consequences for bond holders. Metlifecare will continue to be bound by the contractual obligations to bond holders that it assumed when it issued the bonds on the open market. It will also remain listed as an NZX debt securities issuer and the bonds will remain listed on the NZX Debt Market. This means Metlifecare will remain subject to the NZX listing rules and the provisions of the Financial Markets Conduct Act 2013. It will also remain subject to trustee oversight. Furthermore, there is no reason to believe Metlifecare’s financial performance is likely to deteriorate in the future to the point where the interests of bond holders will be jeopardised or prejudicially affected.
[67] There is also considerable force in Mr Arthur’s submission for Metlifecare that ResIL elected to acquire its bonds well after the current scheme had already been announced. It therefore knew when it purchased them that Metlifecare had received the offer from Asia Pacific and there was a realistic prospect that Asia Pacific would become Metlifecare’s sole shareholder. ResIL therefore acquired the bonds in full knowledge of the risks Mr Priscott has identified.
Result
[68] For the reasons given above I make final orders in terms of the draft orders tendered by counsel for Metlifecare at the hearing. The orders are to take effect immediately.
Costs
[69] The parties have agreed that costs are to lie where they fall. I therefore make no order as to costs.
Lang J
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