Radius Properties Limited

[2017] NZHC 473

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2017-404-000096 [2017] NZHC 473

UNDER	Part 15 of the Companies Act 1993
IN THE MATTER OF	an application for orders approving a scheme of arrangement
RADIUS PROPERTIES LIMITED Applicant

Hearing:	16 March 2017
Appearances:	A J Nelder and D J Raudkivi for Applicant
Judgment:	16 March 2017

ORAL JUDGMENT OF GILBERT J

Solicitors:

Russell McVeagh, Auckland

RADIUS PROPERTIES LIMITED [2017] NZHC 473 [16 March 2017]

[1]      This is an application by Radius Properties Ltd (Radius) pursuant to s 236 of the Companies Act 1993 for approval of a scheme of arrangement under which Radius’ majority shareholder, Montagu Investment Holdings Ltd (Montagu), will acquire 100 per cent ownership of Radius. This will be achieved by:

(a)       all shareholders (including Montagu) receiving a fully imputed special dividend payment of $0.0515 per share; and

(b)      the  cancellation  of  all  Radius’  shares,  other  than  those  held  by

Montagu, in return for a payment to these minority shareholders of

$0.5085 per share.

[2]      Radius is an unlisted property investment company established in 2004.   It has seven properties in its portfolio, five aged care facilities and two industrial properties.     Montagu  currently  holds  12,969,717  ordinary  shares  representing

54.98 per cent of the total ordinary shares on issue.  The remaining 45.02 per cent of

Radius’ shares are held by approximately 750 minority shareholders.

[3]      Radius has not paid a dividend since 2013 because it is pursuing a growth strategy and reinvesting profits into the business.   There is very little liquidity in Radius’ shares as they are not quoted on any stock exchange or securities trading facility.  Almost all of the share transactions conducted in the past three years have involved Montagu acquiring further shares.   In July and August 2015, non-voting shares were offered to all holders of ordinary shares in Radius of $0.42 per share. The rights issue was fully underwritten by Montagu. Very few minority shareholders participated.  As a result, Montagu acquired 99.49 per cent of the non-voting shares on offer.  In the last 12 months, Montagu has acquired approximately 1.17 million ordinary shares from minority shareholders at a price of $0.30 per share.

[4]      One of the principal objectives of the scheme of arrangement is to enable minority shareholders to realise proper value for their shares in circumstances where a great many of them wish to exit their investment but there is otherwise little or no market for their shares.

[5]      Because Radius is a code company and the proposed arrangement affects voting rights, s 236A of the Act applies and the application must be notified to the Takeovers  Panel.     Although  the  arrangement  is  not  a  transaction  under  the takeovers code,  the  Takeovers  Panel  has  taken  the  view  that  a  scheme  of arrangement should generally provide shareholders with the same information as a transaction under the code and a report evaluating the merits of the transaction for each class of affected shareholders and for each interest class of those shareholders should be prepared.  Consistent with this stance, the Takeovers Panel approved the engagement  of  an  independent  advisor,  Simmons  Corporate  Finance  (SCF),  to prepare a report to assist shareholders to assess the merits of the proposed scheme. The  total  consideration  of  56 cents  per  share  payable  under  the  arrangement represents the mid-point of the valuation range of 51 cents to 61 cents determined by SCF.

[6]      On 1  February 2017,  I made initial  orders  to  ensure that  all  of Radius’ shareholders received adequate notice of the proposed arrangement and appropriate information to enable them to assess the merits of it.  I also made directions for the calling of separate shareholder meetings for the two interest classes, Montagu and the minority shareholders, to consider whether to approve the arrangement.   I am satisfied  that  the  terms  of  this  order  have  been  complied  with  and  that  all shareholders  have  had  a  proper  opportunity to  consider  the  implications  of  the proposed arrangement on an informed basis and to vote on it at the shareholder meetings in person or by proxy.

[7]      Montagu  voted  in  favour  of  the  resolution  to  approve  the  arrangement. Although only 58.4 per cent of minority shareholders validly exercised their right to vote,  it  is  clear  that  there  is  strong  support  for  the  arrangement.    Almost  all (98.04 per cent) of the minority shareholders entitled to vote and who voted at the meeting were in favour of the arrangement.  This means that 92.12 per cent of all shares in Radius were voted in favour of the arrangement.

[8]      No  shareholder  has  filed  any  documents  in  opposition  to  the  present application.  In terms of my earlier directions, any such notice was to have been filed and served by 5.00 pm on 7 March 2017.  No one, other than counsel for Radius,

appeared when the matter was called this morning despite notice having been given to all potentially affected parties that the application would be heard today.   The application therefore proceeds on an unopposed basis.

[9]      Section 236(1) of the Companies Act provides:

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.

[10]     “Arrangement” is defined in s 235 of the Act and includes a reorganisation of the share capital of a company by the consolidation of shares in different classes, or by the division of shares into shares of different classes, or by both those methods. While the Radius proposal does not fall into either of these categories, the statutory definition is inclusive and has been interpreted broadly to include arrangements under which shares have been cancelled.1

[11]     Section 236A of the Act provides that the Court may not make an order under s 236(1) affecting the voting rights of a code company unless the company’s shareholders approve the arrangement by a resolution approved by a majority of

75 per cent of the votes of the shareholders in each interest class entitled to vote and voting and by a resolution approved by a simple majority of those shareholders entitled to vote. These voting requirements have been met and the necessary shareholder approval has accordingly been given.

[12]     The Court may not make an order under s 236(1) that affects the voting rights of a code company unless it is satisfied that the shareholders will not be adversely affected by the use of this section rather than the takeovers code to effect the change in voting rights or the applicant has filed a statement from the Takeovers Panel indicating that it has no objection to an order being made under this section.  In this

case, Radius has filed a statement from the Takeovers Panel indicating that it has no

1      See for example Re Auckland International Airport Ltd [2014] NZHC 405 and Re Tenon Ltd

[2016] NZHC 2590.

objection to an order being made under s 236(1).  This requirement is also satisfied. However, I note that the Court is not required to approve the proposed arrangement merely because the Takeovers Panel has no objection to it.2

[13]     In Re CM Banks Ltd, Smith J proposed a four-stage test to be applied in determining whether the Court should approve an arrangement under the then equivalent of s 236 of the Act:3

The duty of the Court is to see (1) that there has been compliance with the statutory provisions as to meetings, resolutions, the application to the Court, and the like; (2) that the scheme has been fairly put before the class or classes concerned; and that if a circular or circulars have been sent out, as is usual, whether before or after the making of the application to the Court, they give all the information reasonably necessary to enable the recipients to judge and vote upon the proposals; (3) that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and (4) that the scheme is such that an intelligent and honest man of business, a member of the class concerned and acting in respect of his interests, might reasonably approve.

[14]     For the reasons already given, the first three limbs of this test have been satisfied in this case.   I am also satisfied that an intelligent and honest business person might reasonably approve of the arrangement, as indeed a large number of them did by voting in favour of it at the shareholder meetings.   I would not have made the initial orders unless I had been satisfied of this.  The consideration payable to minority shareholders under the arrangement represents fair value for their shares as assessed by SCF as an independent expert.  This price is substantially higher than the price struck in recent market transactions and is higher than the offer price in the poorly supported rights issue.   It appears that the arrangement represents the best opportunity for minority shareholders to realise proper value for their illiquid investment in Radius.   Under the current dividend policy, these investors are not receiving any return on their investment.   The arrangement will provide an opportunity for them to reinvest this capital in yield-producing investments.

[15]     In Weatherston v Waltus Property Investment Ltd, the Court of Appeal stated that where competing interests are involved, the four-stage test promulgated in CM

2      Companies Act 1993, s 236A(3).

3      Re CM Banks Ltd [1944] NZLR 248 (SC) at 253.

Banks Ltd should be supplemented by consideration of whether the arrangement is fair and reasonable:4

[35]      In Canada, in the context of legislation also giving the Court broad power  in  respect  of  procedure  and  practice  to  approve  a  proposed arrangement the test of the intelligent and honest business person is supplemented by consideration of whether the arrangement is fair and equitable.  Indeed the latter element can be seen as implicit in the former. The combination of both tests is clearly apt in the context of the Act where competing interests are involved which must be balanced by the Court in deciding whether and, if so, on what basis to approve an amalgamation proposal.

[36]      In the exercise of its discretion to approve in that context 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.

(Citations omitted).

[16]     In my view, the fair and equitable supplementary test applies in the present case because, although there is no opposition to the present application, there is a dissentient minority who voted against the arrangement.  Their interests must also be safeguarded by the Court.  Mr Simmons, the sole director of SCF, notes that the main potential disadvantage of the arrangement is that minority shareholders will not have the ability to participate in any increase in the value of Radius’ shares consequent on any increase in the value of its property portfolio.  However, it is likely to be difficult for  minority  shareholders  to  monetise  this  increase  in  value.    This  is  because Montagu has stated that it is not in favour of selling the company’s investment property portfolio at this stage and it has no current inclination to make a takeover offer.  As noted, the shares in Radius are illiquid and not currently providing any return.

[17]     In all of the circumstances, and particularly having regard to the fact that the consideration payable to minority shareholders under the arrangement equates to the

4      Weatherston v Waltus Property Investment Ltd [2001] 2 NZLR 103 (CA).

mid-point of SCF’s assessment of the full underlying value of all of Radius’ shares, I

consider that the arrangement is fair and equitable and should be approved.

Result

[18]     I make an order pursuant to s 236(1) of the Companies Act 1993 approving the arrangement in terms of the draft order filed.

M A Gilbert J