Companies (Minority Buy-out Rights) Amendment Bill

GERRY BROWNLEE (National—Ilam) Link to this

Let us go straight to new section 112A, inserted by clause 7, which deals with the issue of arbitration when a price for a share is objected to by a minority shareholder.

Just so that people are clear, I point out that, essentially, the board of any company will accept a price for a buy-out, or the board will choose to shrink the shareholding by buying out some of the smaller shareholders. A price will be struck for the value of those shares. If the shareholders accept that price, everything is fine and it goes through with no problem. If the shareholders do not accept it, then they have a right to object. The procedure is that the company strikes the price, the shareholders have 10 days in which to think about it, and if they reply in writing that, no, they do not accept it, the parties go off to arbitration. The question then becomes who pays for the arbitration.

The interesting thing is that if the cost of arbitration was loaded on to the board, then effectively the board would have a gun to its head, because it would either pay for the arbitration process or lift the share price. The board would have to make a determination, depending on how big its purchase was, about what it should do. However, I have to say that in most cases the value of the purchase would be far greater than the cost of the legal proceedings surrounding arbitration. By the same token, if the cost of the arbitration was to be borne by the minority shareholders, then they effectively would have a gun held to their heads, because they would have to make a decision about whether they should spend their money on arbitration. In some cases they themselves will be entities, and they will have another subset of shareholders with expectations of the shares in the other entity. So the minority shareholders would have to decide whether to take a case to arbitration and wear all the costs, in the hope that any increase in the share price would be more than offset—much more than offset—by the gain they made on the share price itself.

So it is a bit of a catch-22 situation. It almost means that arbitration is not open to minority shareholders. It is not a process that needs to be used by a board. It is my opinion that the weight of authority in the buy-out lies with the board. In fact, this bill does exactly the opposite.

It would be useful to get the opinion of the Minister of Commerce on this matter. It is a relatively fine point. The politics of this House will not rise or fall on this particular issue, nor will the positions that people take in terms of whether to support the bill. As the chairman of the Commerce Committee, I feel a bit remiss for not picking up on it a bit sooner. I think our enthusiasm to get what effectively amounts to protection for minority shareholders in buy-out situations was so fervent that we did not quite think through just how a provision like this might work.

It is not too late to fix it. The Committee could insert a small amendment to make it clear where the costs of the arbitration process would fall. I will quote from the intention of the bill, as stated at the start of it, in the purpose clause, so that we are all clear. Well, I cannot find it, but the purpose is to protect small shareholders from being steamrolled by a much larger entity. I suppose that an amendment bill does not have a purpose clause, because its purpose is to amend the main Act. None the less, if Parliament’s intention was and is to protect those interests, it seems a little ridiculous to have a provision in the bill that immediately can be seen to impugn those interests. The Minister’s view on that would be interesting. I wonder whether we could put in a small provision that split the matter fifty-fifty: if arbitration came out in favour of an increased share price, then the cost of the arbitration would be borne by the offering party; and, similarly, if arbitration came out in favour of the initial price, then the cost of the arbitration would be borne by the applicant. I hope the officials are listening, because I think it would be far better that an amendment like that were written by officials and introduced by the Minister, instead of a scrappy bit of paper being before the Committee. It seems to me that a fifty-fifty deal is not an unreasonable position to have. If one side wins, they get the win, and if the other side wins, they get the win.

I will leave my comments there. I know that the Chairperson will not be looking to stifle the debate. My colleagues have mentioned a number of things they want to talk about, and, hopefully, the Minister will accumulate the concerns. In fact, I do not think there are very many concerns; this matter might be all we want to talk about. I hope the Minister will give us a bit of heads-up as to whether we ourselves need to introduce an amendment.

Hon LIANNE DALZIEL (Minister of Commerce) Link to this

I will respond briefly to Gerry Brownlee’s point, because I think the member raises it in a genuine spirit of trying to resolve a difficult issue. Obviously, when we are talking about mum and dad investors, we do not want them to be in a situation where they are taking complicated and expensive court action, and arbitration, obviously, is not the most desired outcome in that regard. However, there has to be a mechanism for resolving a dispute when a dispute arises. I think the provision in the bill that actually provides some comfort in this regard is the ability for the arbitrator to award damages. People who are utilising the system unreasonably and putting pressure on a minority shareholder will find the damages that might be awarded against them a much higher discipline than the fear of sharing half the costs, if, in fact, the changes were made. The damages provision could cover all of the cost—and, indeed, more—to deal with the particular issue. The issue of damages is included under the provisions of what the arbitrator can award. The arbitrator has the power to award damages in those circumstances.

I want to take this debate away from the mum and dad investors for a minute and to ask members to think about the case where this issue arose—Natural Gas Corporation Holdings Ltd v Infratil 1988 Ltd. What we are actually talking about—a more likely situation—is a company that was started as a family firm, is subject to a takeover, the person stays within the company for a period of time, further changes occur, and that person wants to opt out. So we are not necessarily talking about people who are without means; we are often talking about people with different commercial levels of strength from a legal perspective. I believe that the provisions in the bill that allow for discretion in the awarding of damages and payment of interest will, essentially, encourage companies and shareholders alike to be realistic about the initial value of the shares. I believe that that will discourage unnecessary delays.

Dr RICHARD WORTH (National) Link to this

I will respond to the comments that the Minister of Commerce has made, because I think the matter is actually a bit more subtle than the way in which she has put it. The core provisions in Part 1, which National supports, are quite clearly the new section 112 and the provisions in new section 112A—both sections are in clause 7—which the Minister and Mr Brownlee have been referring to.

The scheme of the legislation is very simple. The company gives notice of its offer to a shareholder, and the shareholder may accept that offer or may object. In the absence of objection the company must purchase the shares. Then there is the arbitration mechanism, which is described in section 112A.

I think probably two substantive points emerge from what I have said. The first is the point that I made in part in my second reading speech. From the way that section 112(2) was originally drafted, the price had to be “an honest estimate of the value”. That has now been changed, and appropriately so—and the Commerce Committee comments in its report on why it made that change—to a new test: “a fair and reasonable price”. There were big problems with using the phrase “an honest estimate”. I think there are certainly some problems of a linguistic nature in talking about “fair and reasonable”. What is the actual difference between “fair” on the one hand, and “reasonable” on the other hand? There are two subsections that will guide those who have to make a judgment on these issues as to what is “fair and reasonable”. The first is set out in subsection 112(2), and subsection 112(3) allows for a different methodology, which can be used if the first methodology is not appropriate. The second methodology is to be used where it would be “clearly unfair” to follow the methodology contained in the previous subsection.

Comment has been made on this issue of arbitration. There is no doubt about it: these are most generous arbitration provisions, which one would not normally strike in a statute. Normally, there would simply be something along the line that in the event of a dispute there could be a submission to arbitration, and the provisions of the Arbitration Act 1996 would apply. But here we have something quite different and, I think, much better.

I think the Minister has correctly identified the most common class of case where there exists the possibility of an injustice being done to a minority shareholder—the founder shareholder who continues in the company, then events change and he or she wants to exit the company. The normal rule in an arbitration context is that costs follow the event, which means the loser pays. In these particular provisions relating to arbitration, we see that that principle is being echoed in a number of ways. For example, if we look at section 112A(2), we see that it states: “If the price determined for the shares—(a) exceeds the provisional price paid, the arbitral tribunal must order the company to pay the balance owing to the shareholder:”. In that circumstance it would be the shareholder who gained the costs award. In the second circumstance, where the price determined for the shares “(b) is less than the provisional price paid, the arbitral tribunal must order the shareholder to pay the excess to the company.”, it would be the company that received the costs award. But there is the prospect of not only a costs award; the award may include interest. Again, we see the reflection of the loser pays in section 112A(3): “Except in exceptional circumstances, an arbitral tribunal must award interest on any balance owing or excess to be paid …”.

The final thing I would say on the question of costs is picked up in subsection 112(7), which imports clause 6 of schedule 2 of the Arbitration Act 1996. If we look at that particular provision, we see that it really is nothing more than a code for the “costs and expenses of an arbitration”. But here the term “costs and expenses of an arbitration” is given an extended meaning. Also, I have picked up an error in the drafting that has been occasioned by the delay. I am referring to section 112A(7). The term “costs and expenses of an arbitration” in that provision includes “where a balance is owing to the shareholder,—(a) the reasonable legal costs of the shareholder on a solicitor-and-client basis;”. Under the Lawyers and Conveyancers Act, those concepts have now been changed, and that wording should be “on a lawyer-and-client basis” in order to be consistent with the new regime.

Section 112A(7)(b) states: “the reasonable costs of expert witnesses.” So we see here a bias in the case of the minority shareholder who wins. That shareholder, in the context of a costs award, can get a little more. It is unusual—very unusual—for costs to be awarded reflecting what used to be called a “solicitor-and-client basis” but is now called a “lawyer-and-client basis”. That is most unusual. It is reasonable that the costs of expert witnesses generally form part of a costs award, so that is a change that should be made.

I have no other comment on Part 1. Part 1 is otherwise, I believe, well-drafted and strikes an appropriate balance.

LINDSAY TISCH (National—Piako) Link to this

The Minister’s explanation as to the costs of arbitration is taken on board, and, certainly, the comments that my colleague Dr Worth mentioned satisfy the question that I had during the second reading of the bill. I thank them for those explanations.

I have a couple of points to make. The first relates to the date of the valuation of the shares. There certainly was some concern among the submissioners about the trigger date for the valuation of the shares. New section 112(2), set out in clause 7, has been amended from that set out in the original bill, to require that the date of the valuing of the shares is at the close of business on the day before the day on which the special resolution is voted on. That is the example in the Canadian Business Corporation Act. We see under new section 112C, “Timing of transfer of shares—(1) On the day on which a board gives notice under section 111(2)(e) that the board agrees to the purchase of the shares by the company,—(a) the legal title to those shares passes to the company; and (b) the rights of the shareholder in relation to those shares end.”

When those ownership shares have transferred, the question then arises as to when the minority shareholder loses legal and beneficial title to those shares. Once the valuation is done the shares are transferred, The ownership of shares gives shareholders three rights, currently: to vote, to make distribution of the shares, and to receive distributions. None of those rights are retained from that time onwards. Sellers no longer have an interest in the company’s future once those decisions have been made, and therefore they should not be able to vote. In addition, the minority shareholders should not retain the right to obtain distributions. That was clarified within the discussions at the select committee, and is identified here.

Those are the points I wanted to bring forward. I am happy with the Minister’s explanation as to the costs of arbitration, and there are no other points that I wish to canvass with her.

GERRY BROWNLEE (National—Ilam) Link to this

We have had very rapid discussions on this particular matter. I appreciate the direction that the Minister of Commerce gave us as to how the Arbitration Act itself might work. Also, concerning the particular provisions and their interactions with the law as explained by Dr Worth, I am now quite satisfied that there is no anomalous position. As it has been explained to me by my colleague Dr Worth, the situation is that essentially the loser does pay. It seems to me that that is totally fair in this situation, and National members will be able to continue to support the bill.

I assume that in a minute we will come to the debate on the title. I think there is quite a debate to be had on the title, and it would not surprise me if it were overturned and a new name put on the bill. Let us see how it goes.