Re Trilogy International Ltd
[2018] NZHC 580
•29 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-000237
[2018] NZHC 580
IN THE MATTER OF AND
IN THE MATTER OF
a scheme of arrangement under Part 15 of the Companies Act 1993
TRILOGY INTERNATIONAL LIMITED
Applicant
Hearing: 28 March 2018 Counsel:
E S Scorgie and R F Wallis for the Applicant S G Schenone and S C D A Gollin for
CITIC China Partners III, L.P.
Judgment:
29 March 2018
JUDGMENT OF EDWARDS J
This judgment was delivered by Justice Edwards on 29 March 2018 at 10.45 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors: Chapman Tripp, Auckland
Minster Ellison Rudd Watts, Auckland
TRILOGY INTERNATIONAL LTD [2018] NZHC 580 [29 March 2018]
Introduction
[1] Trilogy International Ltd (TIL) is a New Zealand limited company listed on the NZX main board and ASX official list. Through its subsidiaries, TIL cultivates essential natural products and home fragrance brands in New Zealand and around the world. These brands include Trilogy, Ecoya, Goodness, Lanocreme and By Nature. Another of TIL’s subsidiaries distributes cosmetics, skincare and haircare brands in New Zealand.
[2] TIL seeks final orders approving a scheme of arrangement under Part 15 of the Companies Act 1993 (Act). The proposed scheme would allow TIL NZ Rose Investments Ltd, a wholly owned subsidiary of CITIC China Partners III, L.P. (CITIC), to purchase TIL’s shares for $2.90 per share (Scheme).
[3] On 22 February 2018 I made initial orders prescribing the process for the Scheme to be put to, and voted on, by TIL’s shareholders (Initial Orders). In accordance with the Initial Orders, the shareholder meeting to vote on the Scheme was held on 14 March 2018. The Scheme was approved by substantially more than the required majorities stipulated in the Act.
[4] CITIC filed a notice of appearance and memorandum of counsel in respect of the application. It does not oppose orders approving the Scheme but counsel appears to address an agreement CITIC reached with The Business Bakery LP (TBB), TIL’s largest shareholder, after the Initial Orders were made.
[5] No other appearances have been filed by any other party, and no notices of opposition have been received.
The Scheme
[6] As noted above, the Scheme will allow TIL NZ Rose Investments Ltd to purchase TIL’s shares for $2.90 per share. The Scheme itself is relatively straightforward. The effect of it is that TIL’s shareholders will exchange their shares for cash. Each shareholder will receive the same consideration for each share that they hold.
[7]The key scheme documents are as follows:
(a)The Scheme Implementation Agreement dated 14 December 2017 between CITIC and TIL. In very simple terms, this agreement prescribes the terms of the Scheme and provides for it to be put to TIL’s shareholders.
(b)The Deed Poll, defined in the Scheme Plan (described below) as the deed poll entered into by BidCo (that is, TIL NZ Rose Investments Ltd) and the bidder (that is, CITIC). The Deed Poll obliges BidCo to pay in accordance with the terms of the Scheme, and CITIC guarantees the performance of that obligation.
(c)The Scheme Plan sets out the terms and conditions of the Scheme. Formal approval of this Scheme Plan is sought, with orders that it binds TIL, CITIC, TIL NZ Rose Investments Ltd and the Scheme shareholders (as defined in the Scheme Plan). A final copy of the Scheme Plan dated 22 February 2018 forms part of the application for final orders.
[8] All Scheme conditions have now been fulfilled. In particular, NZX issued a letter of approval of the Notice of Meeting on 23 February 2018. The Takeovers Panel issued a “no objection” letter on 22 March 2018. On 27 March 2018 the Overseas Investment Office granted consent to CITIC in respect of the Scheme. Finally, the Deed Poll has been executed by CITIC and TIL NZ Rose Investments Ltd.
Legal framework
[9] The law relevant to schemes of arrangement is set out in the Act. The principles applicable to those statutory provisions are set out in Re Fliway Group Ltd1 and Re Nuplex Industries.2 The summary which follows is largely drawn from those cases.
1 Re Fliway Group Ltd [2017] NZHC 3216.
2 Re Nuplex Industries [2016] NZHC 1677.
[10] Section 236(1) of the Act allows a court to order that an arrangement be binding on a company and on such other persons or classes of persons as the court may specify. Any such order made under s 236 may be made on such terms and conditions as the court thinks fit. Where an order is made that affects the voting rights of a code company, the takeovers code does not apply.3
[11] Section 236A is engaged in this case because TIL is a code company for the purposes of the Takeovers Act 1993 and the Scheme will affect TIL’s voting rights.4 This means TIL was required to notify the Takeovers Panel of its application at the same time as filing the application. Under s 236A(2), a court may not make an order approving a scheme of arrangement unless:
(a)the code company’s shareholders approve the arrangement or amalgamation in accordance with subsection (4); and
(b)either of the following applies:
(i)the court is satisfied that the shareholders of the code company will not be adversely affected by the use of section 236(1) rather than the takeovers code to effect the change involving the code company; or
(ii)the applicant has field a statement from the Takeovers Panel indicating that the Takeovers Panel has no objection to an order being made under section 236(1).
[12] Section 236A(4) provides that, for the purposes of s 236A(2)(a), the code company’s shareholders may only approve the arrangement or amalgamation in the following way:
(a)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 on the question; and
3 Section 236B.
4 Section 236A(1).
(b)by a resolution approved by a simple majority of the votes of those shareholders entitled to vote.
[13] Section 237(1) of the Act allows the court to make additional orders to give effect to a scheme of arrangement approved under s 236. Those orders may prescribe terms and conditions relating to the matters set out in subs (1)(a)–(e) and may also relate to such other matters that are necessary or desirable to give effect to the arrangement.5
[14] The court’s obligations in approving a scheme of arrangement were summarised in Re CM Banks Ltd,6 and applied in both Fliway7 and Nuplex.8 The duty of the court, as summarised by Muir J in Fliway, is to see:9
(a)that there has been compliance with the statutory provisions as to meetings, resolutions, the application to the Court, and the like;
(b)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;
(c)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
(d)that the scheme is such that an intelligent and honest person of business, a member of the class concerned and acting in respect of his interest, might reasonably approve.
[15] The Court of Appeal has confirmed that the “intelligent and honest person of business” test set out in CM Banks is to be supplemented by a consideration of whether the proposal is “fair and equitable”. It noted that 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
5 Section 237(1)(f).
6 Re CM Banks Ltd [1944] NZLR 248 (SC) at 253.
7 Re Fliway Group Ltd [2017] NZHC 3216 at [8].
8 Re Nuplex Industries [2016] NZHC 1677 at [10].
9 At [8].
a proposal.10 That additional criteria has also been applied in Nuplex11 and Fliway,12
both of which involved the takeover of a code company.
Has there been compliance with the statutory provisions and the Initial Orders?
[16] Mr Sinclair’s second affirmation dated 22 March 2018 outlines the steps taken to comply with the statutory provisions and the Initial Orders which were made pursuant to s 236(2) of the Act.
[17] Mr Sinclair confirms that copies of all documents filed in the proceeding were sent to CITIC and to TIL NZ Rose Investments Ltd as required by the Initial Orders. Furthermore, the “Shareholder Materials” have been distributed to TIL’s shareholders in accordance with Initial Orders 5 to 10.
[18] The Takeovers Panel was informed of the application at the same time as it was filed in compliance with s 236A(1). The Takeovers Panel has also been sent copies of all documents filed in the proceeding in compliance with Initial Order 2. The Takeovers Panel issued a “no objection” letter dated 22 March 2018 which meets the requirements of s 236A(2)(b)(ii).
[19] The Scheme meeting was held on 14 March 2018 in accordance with Initial Order 15 and was run in accordance with Initial Order 17. Shareholders voted in two classes, being CIDSUR and non-CIDSUR shareholders, in accordance with the Initial Orders. The resolution put to the meeting was in the following terms: “That the Scheme (the terms of which are described in the Scheme Booklet as sent to Shareholders dated 22 February 2018) be approved”.
[20] Mr Sinclair represented the voting results in a table which I reproduce as follows:
10 Weatherston v Waltus Property Investments Ltd [2001] 2 NZLR 103 (CA) at [35].
11 At [11].
12 At [9].
Class For
Against
Abstain
Total
Non-CIDSUR
shareholders
50,382,880
99.03%
494,316
91,358
50,968,554
CIDSUR
2,615,181
100%
2,615,181 All shareholders
52,998,061
99.08%
(of those voting)
72.83%
(of all voting rights)
494,316
91,358
53,583,735
72,766,907
(total voting rights)
[21] As this table shows, the resolution was passed by over 75 per cent of those shareholders in each interest class entitled to vote and voting, and by more than a simple majority of the votes of those shareholders entitled to vote. Accordingly, there was compliance with s 236A(4) of the Act and with Initial Order 17.4.
[22] The voting result was announced to the market by announcement shortly after the conclusion of the Scheme meeting. The results were lodged on the NZX Main Board and the ASX market announcement platform. All other requirements of Initial Orders 19 and 20 were complied with.
[23] Based on the evidence filed in support of the application, I am satisfied that TIL has complied with its relevant statutory obligations and with the Initial Orders.
Has the Scheme been fairly put to shareholders?
[24] The Shareholder Materials in this case were prepared in accordance with the Guidance Note from the Takeovers Panel as to the conduct of schemes of arrangement for code companies.
[25] The Scheme Booklet, which was included in the Shareholder Materials, contained summaries of the Scheme, reasons to vote for and against the Scheme, and the Independent Advisor’s Report in a form that is understandable to retail
shareholders. The Scheme Plan and the Deed Poll were also included in the Scheme Booklet.
[26] Both the NZX and the Takeovers Panel were provided with advanced drafts of the material to be included in the Scheme Booklet, and neither had any outstanding matters which needed to be addressed. The Takeovers Panel’s no-objection letter confirms the Panel’s view that all material information relating to the Scheme was disclosed.
[27] I reviewed the draft Shareholder Materials prior to making the Initial Orders. Mr Sinclair confirms that there were no substantive changes made to those drafts except to complete dates which were square-bracketed in the drafts that I reviewed.
[28] As set out above, the Initial Orders set out a process by which the Scheme would be fairly put to shareholders. The Initial Orders provided for the Shareholder Materials to be made available both electronically (whether by email or on a website) and in hard copy. Compliance with those Initial Orders ensured that all shareholders had reasonable access to information about the Scheme as set out in the Shareholder Materials.
[29] I am satisfied that the information provided to shareholders fully and fairly explained what was proposed, its intended effect, the reason why it was proposed, and the reasons for any recommendations for it. Therefore, I am satisfied that the Scheme has been fairly put to shareholders.
Were shareholders fairly represented by those who attended the meeting?
[30] Shareholders voted in two interest classes in accordance with the Act and the Initial Orders. I approved those two classes at the time the Initial Orders were made. The Takeovers Panel also agreed with TIL’s assessment of class composition.
[31] Mr Sinclair confirms that TIL’s option holders were given the opportunity to exercise options that had not yet vested. All option holders elected the “net settlement” option offered with the result that immediately prior to the Record Date for the Scheme an additional 526,207 shares in TIL were issued to those option holders.
[32] The shareholders who were entitled to be represented and vote were those shareholders whose names appeared in TIL’s share register as at 7.00 pm on 12 March 2018. Twenty-one shareholders (representing 1,164,072 of the voting shares) attended the meeting in person. The remaining voting shareholders voted by proxy. Representatives of Computershare counted the votes at the meeting and the votes were scrutineered by PricewaterhouseCoopers.
[33] On the basis of this evidence, I am satisfied that shareholders were fairly represented by those who attended the meeting, and that they acted bona fide and without coercion.
Is the Scheme such that an intelligent person of business might reasonably approve it and is it fair and equitable?
[34] The proposed purchase price of $2.90 per share enables TIL’s shareholders to obtain a premium for their shares. This compares favourably with the price at which those shares traded prior to the announcement of the Scheme. The price is at the upper end of the range of values for TIL’s shares identified by the Independent Advisor.
[35] I accept that the Scheme will also enable TIL to expand into new markets and achieve international growth faster.
[36] All shareholders will receive the same consideration for their shares and are treated equally under the terms of the Scheme. There is no impact on TIL’s creditors. And, as outlined above, option holders have unanimously elected to convert their options to shares. On that basis, the Scheme can be regarded as fair and equitable.
[37] Finally, I accept counsel for TIL’s submission that the results of the Scheme Meeting itself, where the overwhelming majority voted in favour of the Scheme, also demonstrates that an intelligent person of business might reasonably approve the Scheme.
[38] Accordingly, I am satisfied that the Scheme is one that an intelligent person of business might reasonably approve, and that it is fair and equitable.
Does the CITIC/TBB Deed impact on the Scheme?
[39] The only issue which has arisen since the Initial Orders were made concerns the effect of a deed between CITIC and The Bakery Business (TBB). TBB is TIL’s largest shareholder, holding 31.2 per cent of TIL’s shares.
[40] The agreement arises out of allegations made by CITIC in relation to potential breaches of warranties given by TIL under the Scheme Implementation Agreement. The independent directors of TIL formed the view that CITIC’s allegations had no foundation. TBB also considered that CITIC’s assertions had no foundation.
[41] CITIC’s assertions had the potential to disrupt the Scheme. Accordingly, TBB entered into negotiations with CITIC in an attempt to resolve the dispute to allow the Scheme to go ahead. These negotiations resulted in a deed of agreement dated 12 March 2018 between CITIC and TBB (CITIC/TBB Deed). The effect of the agreement reached is that TBB agrees to pay CITIC $10 million on account of certain costs incurred by CITIC in connection with the transaction and the Scheme. In return, CITIC waives any claims it considers were available to it in relation to the warranties.
[42] TIL was not a party to the CITIC/TBB Deed and was not involved with the negotiations. TIL was provided with a copy of the Deed on 13 March 2018. The independent directors of TIL sought advice from Grant Samuel on the effect of it in relation to the Scheme and also received advice from Chapman Tripp. Having received that advice, the independent directors concluded that the Deed did not affect the merits of the Scheme and they maintained their recommendation to shareholders that the Scheme be approved.
[43] The fact of the CITIC/TBB Deed (but not its specific content) was addressed directly at the Scheme Meeting by one of TIL’s independent directors. Reference was also made to the independent advice sought in relation to the Deed, and the recommendation of the independent directors.
[44] The Takeovers Panel was informed about the CITIC/TBB Deed on 14 March 2018. The Takeovers Panel sought additional information from TIL and CITIC in
relation to the Deed, which was provided on 20 March 2018. The Takeovers Panel issued a no-objection letter on 22 March 2018.
[45] After reviewing the evidence and submissions relating to the CITIC/TBB Deed, I am satisfied that it does not provide a reason not to approve the Scheme. The grounds for that conclusion are as follows:
(a)First, the CITIC/TBB Deed does not change the separate interests for voting purposes of a class of shareholder. The CITIC/TBB Deed does not create any dissimilarity of rights that requires treatment of TBB as a separate class. Each shareholder remains entitled to receive the same consideration per share, and CITIC/TIL NZ Rose Investments Ltd’s payment obligations also remain the same. The approval by the Takeovers Panel confirms that position.
(b)Second, the Deed did not influence the manner in which TBB voted on its shares. TBB’s proxy in favour of the Scheme was provided on 8 March 2018, which was before the issues culminating in the Deed were raised. TBB did not alter its proxy following completion of the Deed.
(c)Third, the Deed does not alter the Scheme itself or any party’s right under it. All shareholders will still receive the same and equal consideration for their shares. The Deed does not create any new obligations or new rights, and does not otherwise impact on the Scheme. Grant Samuel, the independent adviser, has also confirmed that the CITIC/TBB Deed does not impact on the Scheme.
(d)Fourth, the fact of the CITIC/TBB Deed was disclosed to shareholders and was addressed at the Scheme meeting. As set out above, an overwhelming majority nevertheless voted in favour of the Scheme and there has been no opposition to the approval of the Scheme.
[46] Accordingly, the fact of the CITIC/TBB Deed does not alter any of the conclusions reached on the key questions set out above, and does not provide a reason not to approve the Scheme.
Result
[47] TIL’s application for approval of the Scheme is granted. I make orders in the terms of the draft orders provided which are as follows:
(a)The proposed scheme of arrangement between the applicant, Trilogy International Limited and its shareholders, as described in the Scheme Plan (a copy of which is annexed to this order), is approved and binding upon Trilogy International Limited, each of its shareholders, CITIC Capital China Partners III, L.P, and TIL NZ Rose Investments Limited in accordance with its terms (including the conditions in cl 2 of the Scheme Plan); and
(b)Trilogy International Limited is granted leave to apply to the Court for approval of any amendment, modification or supplement to the Scheme.
Edwards J
3