Tenon Limited
[2016] NZHC 2947
•7 December 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2590 [2016] NZHC 2947
UNDER Part 19 of the High Court Rules IN THE MATTER
of a scheme of arrangement under Part 15 of the Companies Act 1993
AND
IN THE MATTER OF
TENON LIMITED Applicant
Hearing: On the papers Appearances:
T B Fitzgerald and S V A East for Applicant
Judgment:
7 December 2016
JUDGMENT OF LANG J
[on originating application for orders approving a scheme of arrangement under Part 15 of the Companies Act 1993]
This judgment was delivered by me on 7 December 2016 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
In the matter of TENON LIMITED [2016] NZHC 2947 [7 December 2016]
[1] The applicant, Tenon Limited (Tenon), is incorporated in New Zealand and is listed on the main board of the New Zealand Stock Exchange. Tenon and its subsidiaries are involved in the processing, marketing and distribution of wood products.
[2] Tenon wishes to return approximately US$72 million of capital to its shareholders. It seeks the approval of the Court under s 236(1) of the Companies Act 1993 (the Act) to an arrangement under which one of every two Tenon shares is cancelled in exchange for a payment to shareholders of US$2.20 per cancelled share.
Background
[3] Tenon is a holding company. It owns 100 per cent of the shares in Tenon Holdings Limited (THL), which in turn is the sole shareholder of two companies. The first of these is Tenon Manufacturing Limited (TML), which operates a business known as Clearwood. Clearwood is based in New Zealand, and operates a large clearwood (pinus radiate) sawmill and re-manufacturing facility in Taupo. It also has associated sales and marketing activities. Clearwood runs a substantial business that employs approximately 275 full-time staff.
[4] THL also owns the shares in an American company called NACS USA, Inc (NASC). NASC owns several companies that operate businesses in the United States of America. The NACS companies acquire product from Clearwood and other suppliers for distribution throughout North America. NASC employs approximately 970 employees, and has substantial warehouse facilities. NACS acquires approximately ten per cent of its product requirements from the Clearwood business in New Zealand.
[5] THL has entered into a contract to sell its American-based business to an American entity for approximately US$110 million. A resolution approving the proposed sale of the business was passed with a majority of more than 99.5 per cent at the annual meeting of Tenon’s shareholders held on 18 November 2016.
[6] The proposed scheme of arrangement relates to part of the funds that will be realised as a result of the sale of the North American business. THL will distribute
the sale proceeds to Tenon by way of dividend. Tenon will use those funds to repay its entire net debt. It will then use the balance of the dividend to undertake the return of capital to shareholders. The return of capital is being made in US dollars because the sale proceeds will be received in that form. Tenon’s largest shareholders are also likely to want to be paid in that currency.
The statutory scheme
[7] Tenon seeks approval to the scheme under s 236 of the Companies Act 1993. Section 236 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) Before making an order under subsection (1) of this section, the Court may, on the application of the company or any shareholder or creditor or other person who appears to the Court to be interested, or of its own motion, make any one or more of the following orders:
(a) An order that notice of the application, together with such information relating to it as the Court thinks fit, be given in such form and in such manner and to such persons or classes of persons as the Court may specify:
(b) An order directing the holding of a meeting or meetings of shareholders or any class of shareholders or creditors or any class of creditors of a company to consider and, if thought fit, to approve, in such manner as the Court may specify, the proposed arrangement or amalgamation or compromise and, for that purpose, may determine the shareholders or creditors that constitute a class of shareholders or creditors of a company:
(c) An order requiring that a report on the proposed arrangement or amalgamation or compromise be prepared for the Court by a person specified by the Court and, if the Court thinks fit, be supplied to the shareholders or any class of shareholders or creditors or any class of creditors of a company or to any other person who appears to the Court to be interested:
(d) An order as to the payment of the costs incurred in the preparation of any such report:
(e) An order specifying the persons who shall be entitled to appear and be heard on the application to approve the arrangement or amalgamation or compromise.
(2A) If the arrangement or amalgamation or compromise involves a transfer or amalgamation that requires the written approval of the Reserve Bank of New Zealand under section 44 of the Insurance (Prudential Supervision) Act 2010, the Court may not make an order under this section unless that approval has been given.]
(3) An order made under this section has effect on and from the date specified in the order.
(4) Within 10 working days of an order being made by the Court, the board of the company must ensure that a copy of the order is delivered to the Registrar for registration.
…
[8] The term “arrangement” as used in s 236 has been given a broad construction.1 Several similar schemes of arrangement under which capital has been returned to shareholders through the cancellation of shares on a pro rata basis have been held to constitute arrangements for the purpose of s 236.2
[9] The principles that apply to the application of s 236 are now well established. The authority most often cited in relation to the approach to be taken in relation to s
236 and its predecessors was set out in Re CM Banks Ltd, in which Smith J said:3
The duty of the Court was summarised by Astbury, J., in In re Anglo- Continental Supply Co., Ltd. in these words: “In exercising its power of sanction under s. 120 [our s. 159], the Court will see, first, that the provisions of the statute have been complied with; secondly, 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, thirdly, that the arrangement is such as a man of business would reasonably approve.”
(footnotes omitted)
[10] In Suspended Ceilings (Wellington) Ltd v Commissioner of Inland Revenue
the Court of Appeal considered an appeal against the approval of a proposal under which a debtor company sought to have a single unwilling creditor bound to the
1 Suspended Ceilings (Wellington) Ltd v Commissioner of Inland Revenue (1997) 8 NZCLC
261,318 (CA).
2 See eg Re Auckland International Airport Ltd [2014] NZHC 405.
3 Re CM Banks Ltd [1944] NZLR 248 (SC) at 252.
compromise of a debt.4 The majority observed that they were “inclined to the view” that an applicant under s 236 “should at least satisfy the Court that it would be unreasonable to not make the order sought”.5 The majority considered that “to enquire merely whether an intelligent and honest business person might reasonably approve is, or may be, inadequate safeguard for interests which oppose the application”.
[11] In Weatherston v Waltus Property Investments Ltd a group of shareholders opposed an application seeking approval under s 136 for an arrangement under which 29 companies were to be amalgamated.6 The Court of Appeal observed that “the higher test of commercial reasonableness suggested by the majority in Suspended Ceilings may not be pertinent beyond its particular context”.7 The Court noted, however, that in Canada the test “is supplemented by consideration of whether the arrangement is fair and equitable”.8 The Court observed that a combination of both tests was clearly apt “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.”9
[12] Although the observations of the Court of Appeal in Suspended Ceilings arguably restricted the application of the “fair and equitable” test to cases where there were competing interests, it has been applied in at least one case where there has been no opposition to the proposed arrangement. In Re Auckland Airport Ltd the applicant sought approval of an arrangement involving the return of share capital by means of a payment made in consideration for the pro rata cancellation of shares. There was no opposition to the proposed arrangement. Notwithstanding this Winkelmann J referred to the test in C M Banks as having been “supplanted” by the
decision in Weatherston.10 Venning J took a similar approach, albeit in the context of
a contested application, in Re ACS (NZ) Ltd.11
4 Suspended Ceilings (Wellington) Ltd v Commissioner of Inland Revenue above n 1.
5 At 261,318.
6 Weatherston v Waltus Property Investments Ltd [2001] 2 NZLR 103 (CA).
7 At [34].
8 At [35], citing Re Canadian Pacific Ltd (1990) 73 OR (2d) 212.
9 At [35].
10 Re Auckland Airport Ltd, above n 2, at [9].
11 Re ACS (New Zealand) Ltd [2012] NZHC 1396 at [6].
Procedural requirements
[13] On 21 October 2016, I made a series of procedural or initial orders. These were designed to ensure that all of Tenon’s shareholders received adequate notice of the proposal in anticipation of the general meeting on 18 November 2016 at which a resolution endorsing the arrangement was to be considered. In addition, the orders made provision for shareholders who opposed the proposed arrangement to file documents in opposition to the application in this proceeding. I am satisfied on the basis of the evidence that has now been filed by Tenon’s General Counsel and Company Secretary that Tenon complied with all of the initial directions that I made on 21 October 2016.
[14] The general meeting of shareholders was duly held on 18 November 2016. I have now received an affidavit from an audit partner from KPMG New Zealand who acted as scrutineer of the procedure adopted at the meeting. His evidence satisfies me that the meeting was held in accordance with Tenon’s constitution, the requirements of ss 125 – 125 of the Act and the directions given by the Court on 21
October 2016.
[15] The initial orders that I made on 21 October 2016 provided that the resolution would be approved if it was passed by a majority of 75 per cent or more of the votes cast. The resolution endorsing the proposal was passed by a majority of 55,834,741 votes to 74,363. The votes cast in support of the resolution therefore represent 99.87 per cent of all votes cast at the meeting. Tenon’s major shareholder, Rubicon Forests Holdings Ltd (Rubicon), voted in favour of the resolution. If Rubicon’s vote is put to one side the result still reflects 99.57 per cent of all votes cast. The resolution was therefore passed by an overwhelming majority of shareholders who voted at the meeting.
[16] No documents have been filed by any shareholder in opposition to the present application. For that reason it proceeds on the basis that it is unopposed.
Decision
[17] As will already be evident, I am satisfied that there has been compliance with the procedural requirements of the Act and the procedural directions given by the Court. The proposed arrangement has been fairly put to the shareholders and they have had an opportunity to cast their votes on a fully informed basis. There can be no suggestion that any faction or group of voters has sought to use the process to coerce the remaining shareholders or to promote their own interests ahead of others in their class.
[18] The material provided in support of the application satisfies me that there is no impediment to the Court granting its sanction to the arrangement. The directors, who are obviously fully familiar with Tenon’s affairs, have reached the considered view that the proposed return of capital to shareholders is the most appropriate way in which to deal with the surplus sale proceeds. The proceeds can rightly be regarded as surplus because all of Tenon’s net debt will be repaid. No creditors are therefore affected by the proposed arrangement.
[19] The company has entered into banking facilities designed to meet its operating needs in the foreseeable future so there is no need for the funds to be used to meet operational requirements. The directors do not foresee any short term capital expenditure requirements and do not plan to make any major acquisitions that might require the investment of capital. They have concluded that the proposed return of capital is therefore the most appropriate way in which to use the funds for the benefit of shareholders. The shareholders clearly agree with the directors’ assessment.
[20] Tenon is a solvent and profitable company, and the directors consider that this will remain the case after the sale of the American-based business and the proposed return of capital. It is also a condition of the proposed arrangement that the directors remain satisfied that Tenon will, immediately after implementation of the arrangement, continue to satisfy the solvency test prescribed by s 4 of the Act as modified by s 52(4).
[21] Clearwood’s employees are not affected by the proposed arrangement because Tenon will continue to operate the Clearwood business in New Zealand in the same way as before.
[22] All shareholders are also equally affected by the arrangement because the cancellation of shares will be effected on a pro rata basis.
[23] Viewed as a whole, the proposed arrangement is clearly one that an intelligent and honest person of business might reasonably approve. It is also fair and equitable, because it will ensure that capital is returned to all shareholders on an equal basis. That fact is reflected in the view that shareholders have expressed collectively through the voting process. That being the case, I consider it is appropriate for the Court to approve the arrangement.
Result
[24] I make an order under s 236(1) of the Act that the proposed arrangement as set out in the Arrangement Plan attached to the draft Final Orders filed on 7
December 2016 is binding on Tenon and its shareholders with immediate effect but subject to the conditions contained in the arrangement. The draft orders may now be sealed by the Registrar.
[25] I reserve leave to the applicant to ask the Registrar to arrange a telephone conference before me at any stage should the assistance or intervention of the Court
be required in relation to the implementation of the arrangement.
Lang J
Solicitors:
Bell Gully, Auckland
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