This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in New Zealand.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The key laws relevant to M&A in New Zealand are:
- the Companies Act 1993 – which governs the administration of New Zealand companies;
- the Takeovers Code – for transactions involving ‘code companies’ (any New Zealand company that is listed, or that has more than 50 shareholders);
- the NZSX Listing Rules – if one of the parties to the transaction is listed on the New Zealand Stock Exchange;
- the Financial Markets Conduct Act 2013 – which governs offer of financial products;
- the Overseas Investment Act 2005 and Regulations – if the business/assets being acquired are worth more than NZ$100 million or there is sensitive land; and
- the Commerce Act 1986 – if there are anti trust/competition law issues.
The key regulators are:
- for matters governed by the Companies Act or the Financial Reporting Act, the Ministry of Business Innovation and Economy (MBIE) – also referred to in this capacity as the Companies Office;
- for listed company matters, NZX, the exchange operator;
- for takeovers, the Takeovers Panel;
- for any offer of financial products (including scrip under a takeover offer), the Financial Markets Authority (FMA);
- for Overseas Investment Act matters, the Overseas Investment Office (OIO); and
- for anti trust/competition law issues, the Commerce Commission.
What is the current state of the market?
2016 has been a strong year for M&A in New Zealand, with a higher than usual number of major listed company transactions. These include the NZME listing and pending merger with Fairfax New Zealand, Z Energy’s acquisition of Chevron’s New Zealand downstream assets, the Nuplex takeover and the potential Sky/Vodafone merger.
We expect the increased M&A activity will persist through the first half of 2017.
Despite predictions of a slow-down in the Chinese economy, there is steady and significant Chinese direct investment into New Zealand. There has also been a pick-up in private M&A activity after a relatively light start to 2016 compared with prior years.
Which market sectors have been particularly active recently?
Sectors which have been particularly active over the last 12-24 months include:
- strong activity in the energy sector – Vector’s $952 million sale of its gas transmission pipeline business to First State Investment Fund; and Z Energy’s $785 million purchase of Chevron’s New Zealand Caltex retail business;
- continued Asian interest in primary products – Shanghai Maling’s $261 million purchase of a controlling interest in Silver Fern Farms; and Sumitomo Forestry’s $370 million purchase of forests near Nelson;
- the return of Australian private equity funds – Pacific Equity Partners’ acquisition of Academic Colleges Group; Archer Capital’s acquisition of New Zealand Pharmaceuticals; and Pacific Equity Partners’ acquisition of Manuka Health New Zealand; and
- continued focus on the aged care sector – Blackstone’s acquisition of Lendlease Group’s portfolio of five retirement villages; Arvida’s continued expansion through the acquisition of seven retirement villages.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
We think the three most significant factors influencing M&A activity over the next two years will be:
- OIO – New Zealand’s foreign investment control regime, as set out in the Overseas Investment Act and administered by the OIO, continues to be a major issue in New Zealand M&A and is likely to continue to be an issue over the next two years. Since the counterfactual test was introduced in 2012, timeframes for OIO decisions involving sensitive land have lengthened significantly and are now much slower than for comparable jurisdictions, such as Australia, where many decisions are made within 30 days of notification.
- PE – Alongside corporate and strategic transactions, we expect strong private equity activity in 2017 and beyond, with Australian and New Zealand sponsors looking to put newly-raised funds to work.
- Funding – Banks are currently keen to fund acquisitions, but pricing is now expected to be on an upward curve and may temper M&A activity.
What are the key means of effecting a merger?
The key means of effecting a merger are:
- an amalgamation – under the provisions of the Companies Act, but this method is not available if one of the merging companies is a “code company”;
- a scheme of arrangement under the Companies Act; or
- a takeover under the Takeovers Code.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
What information is publicly available in relation to a target company will depend principally on whether the company is large and/or listed on the NZX.
If a company is “large” for the purposes of the Companies Act/Financial Reporting Act, the company must file its audited financial statements on the Companies Office register.
If a company is listed, in addition to filing its financial statements, the company must provide half year and full year reports and is subject to continuous disclosure obligations for any material matters.
Outside that limited public information and certain other information (for example, share registers, certain director’s certificates which a shareholder can request from a company under the Companies Act), a target company has no obligation to provide a potential acquirer with due diligence access.
To what level of detail is due diligence customarily undertaken?
The level of due diligence (and by whom) will often depend on the type of transaction and the size of the target company.
Legal vendor due diligence is rare on a deal that has been negotiated bilaterally from early on in the process, but is more common in a competitive bid process (on complex and/or high value transactions).
The level of due diligence for takeovers depends on the co-operation of the target company.
Detailed/full due diligence is usually undertaken for schemes of arrangement.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision making body is the board of directors, with shareholders having approval rights depending on the nature / structure of the transaction and the provisions of any shareholders’ agreement and its constitution.
For a sale of the entire business undertaking by a target company, shareholder approvals would be required:
- from 75% of the shareholders entitled to vote and voting on the transaction – under the “major transaction” provisions of the Companies Act; and
- if the target company is listed, from at least 50% of the shareholders entitled to vote and voting on the transaction – under the material transaction thresholds of the Listing Rules.
What are the duties of the directors and controlling shareholders of a target company?
Under the Companies Act, directors have a duty to act in good faith and in the best interests of a company, and to act for a proper purpose.
Directors of a code company that is the subject of a takeover offer have various procedural obligations under the Takeovers Code, including preparing a Target Company Statement and commission an independent advisor report.
There are no specific duties imposed on controlling shareholders.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Neither employees nor other stakeholders have specific approval or consultation rights (as employees) under a takeover or scheme of arrangement.
Employees will have consultation rights under a sale structured as a business/asset sale.
What regulatory/third party approvals are required and what waiting periods do these impose, if any?
If the transaction involves significant business/assets and/or sensitive land, OIO consent – which currently takes between 3-4 months (without sensitive land) or 4 6 months (with sensitive land).
If the transaction involves anti trust/competition law issues, Commerce Commission clearance (or less commonly, authorisation). Timeframes are wholly dependent on the complexity of the application. Simple clearance decisions can be obtained in 25 working days, while complex clearances may take over 60 working days. Authorisations take, at a minimum 3 months (and, sometimes, significantly longer).
Depending on the target’s business, other specific regulatory approvals may be required (for example Reserve Bank of New Zealand consent).
Third party approvals will depend on the nature of the target and its business; landlord and commercial counterparty consents to a change of control are the most common.
To what degree is conditionality an accepted market feature on acquisitions?
MAC conditions are relatively common, more so where the purchaser is a PE fund. They are especially common where there is a long pre settlement period (which is often necessitated by regulatory requirements – especially OIO consent).
Financing conditions are included on a minority of transactions, but are still relatively common. For an auction process, most bidders will (from a competitive standpoint) endeavour to have financing arranged prior to signing, and some vendors may require this as a condition of bidding.
For transactions with overseas purchasers, OIO approval is a common condition.
What steps can an acquirer of a target company take to secure deal exclusivity?
For a takeover:
- true exclusivity is not possible as no party can be prevented from making a competing offer;
- exclusivity arrangements around recommendations/due diligence access could be possible, subject to fiduciary outs for the target company; and
- asset lock-ups can be achieved through offer conditions.
A potential acquirer is able to acquire up to 19.9% of target company’s voting shares (in total), assuming it does not control the voting rights of any target shares held by third parties. The potential acquirer cannot exceed 20% without making a takeover offer.
Pre-bid agreements with shareholders, where they agree to accept an offer made on certain terms, are permitted and are standard procedure in New Zealand takeovers. The agreements must state that control over voting rights remains solely with the existing shareholder, to avoid issues under the Takeovers Code. Pre-bid agreements are typically entered into immediately prior to launching the bid (and therefore also after building any initial stake), as they must be publicly disclosed.
For a scheme of arrangement –
- Exclusivity is possible, subject to fiduciary outs in the case of a superior proposal;
- Asset lock-ups can be achieved through the Scheme Implementation Agreement.
Voting agreements (where shareholders agree to vote in favour of a scheme) are not permitted where this would put a person over the 20% ‘control over voting rights’ threshold under the Takeovers Code. Voting agreements may also result in the parties becoming a separate interest class for voting purposes – defeating the purpose of the agreement.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Break-fees or reverse termination fees are occasionally used and typically bespoke; perhaps 5-10% of transactions. They are more common with transactions involving foreign parties and more likely with schemes of arrangement (as opposed to takeovers).
Which forms of consideration are most commonly used?
Cash or cash and scrip are the most common forms of consideration – under both takeovers and schemes of arrangement.
At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
For a takeover, when the offer is made. Pre-bid agreements to accept an offer must also be disclosed and are therefore usually sequenced with the offer itself.
For a scheme of arrangement, they are typically disclosed when agreement on deal terms is reached between the offeror and target to proceed with the transaction – disclosure is not required under the Listing Rules (assuming either the buyer or target is listed) while the transaction proposal remains a confidential, incomplete proposal or negotiation.
Are there any circumstances where a minimum price may be set for the shares in a target company?
No, New Zealand does not have a minimum price rule.
Is it possible for target companies to provide financial assistance?
Technically, yes – but it would be uncommon in a public M&A context (and would likely require target shareholder approval).
Which governing law is customarily used on acquisitions?
New Zealand law.
What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?
For a takeover:
- a Takeover Offer;
- if the consideration includes scrip, a Product Disclosure Statement;
- Scheme Implementation Agreement; and
- Notice of Meeting/Information Memorandum (including mandatory Independent Adviser Report (valuation/terms)).
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
The transfer of shares in New Zealand is relatively straightforward and simply requires a share transfer form, which is recorded in the company’s share register. There is no stamp duty or similar tax on share transfers.
Are hostile acquisitions a common feature?
What protections do directors of a target company have against a hostile approach?
Subject to some limited exceptions, the Takeovers Code restricts directors from undertaking defensive tactics in relation to a takeover. But, this does not prevent the directors from taking steps to encourage competing bona fide offers from other parties.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
If a buyer acquires more than 20% of a code company, then it must make a full takeover offer (unless the acquisition of shares has been approved by shareholders for the purposes of the Takeovers Code or in certain other limited circumstances).
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Other than minority buyout rights where the acquirer holds more than 90% (refer para 26 below), a minority shareholder has the usual shareholder rights that apply under the Companies Act and (if the company is listed) the Listing Rules.
Is a mechanism available to compulsorily acquire minority stakes?
If a buyer holds/controls more than 90% of voting rights in a code company, then it must notify the company, the Takeovers Panel and (if the company is listed) NZX, and:
- the buyer has the right to buy out the remaining shareholders; and
- the remaining shareholders have a right to sell their shares to the buyer.