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 regulates the administration and operation of New Zealand companies;
- the Takeovers Code – to the extent that the transaction involves the direct or indirect acquisition of shares in a ‘code companies’ (any New Zealand company that is listed, or that has more than 50 shareholders and more than 50 shareholdings);
- the NZX Listing Rules – where the target or another party is listed on the NZX stock exchange;
- the Financial Markets Conduct Act 2013 – which regulates the offer of financial products (including equity securities);
- the Overseas Investment Act 2005 and associated regulations – to the extent that the value assets or business being acquired exceed NZ$100m or constitute sensitive parcels of land; and
- the Commerce Act 1986 – to the extent that the transaction may give rise to competition or anti-trust issues.
The key regulators in New Zealand are:
- for matters governed by the Companies Act or the Financial Reporting Act, the Companies Office;
- for listed company matters, the operator of the New Zealand stock exchange, NZX Limited;
- for takeovers, the Takeovers Panel;
- for any offer of financial products (including any offer of shares or others securities in connection with an acquisition), 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?
2017 continued a strong run for the New Zealand M&A market. Much of this deal flow was driven by the significant fund raising activities of New Zealand and Australian private equity throughout 2016 and 2017. 2017 also showed an increase in the number and size of transactions undertaken by New Zealand funds.
Overseas investment remains a significant part of the New Zealand M&A market, particularly in larger transactions, with continued interest from Australia and Asia (although with a softening of interest from China). It is anticipated that 2018 may see offshore interest tempered by a recent shift in New Zealand’s overseas investment laws (as noted further below).
2017 also saw a further disparity between the number of new listings on the New Zealand stock exchange and public company takeovers, with only one IPO occurring in 2017 and several listed company takeovers announced by offshore investors. The relatively inactive IPO market seems to be a consequence of the willingness of funds or trade buyers to match or exceed IPO pricing.
Which market sectors have been particularly active recently?
Sectors which have been particularly active over the last 12-24 months include:
- the private equity market which has resulted in an increase in the volume of transactions as existing funds have sought to deploy newly raised capital (e.g. Quadrant and PEP) and recently established funds (e.g. Adamantum) made their initial investments in New Zealand,
and from an industry sector perspective:
- the food and beverage sector has continued to be an active sector – with significant transactions being the acquisitions of, or investments in, Mainland Poultry, Leader Foods and My Food Bag;
- the last 24 months saw increased activity in the healthcare sector, ranging from aged care (Heritage Lifecare and Geneva Healthcare) and general practice (Nirvana Health) to healthcare technology (Healthlink) and supplements (GoHealthy); and
- the financial services market continues to be particularly active as the large trading banks began a programme of divesting non-core business units (e.g. UDC).
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:
- Overseas investment regulation – foreign investment in New Zealand is controlled through a consent regime administered by the New Zealand Overseas Investment Office (OIO) and captures transactions in excess of NZ$100 million and acquisitions of sensitive parcels of land. As a consequence of the recent change in government and increased scrutiny by the OIO, consent timeframes have lengthened and certain investors have been unable to satisfy the OIO’s requirements. The most recent example being HNA Group’s failure to obtain OIO consent for its proposed acquisition of UDC Finance. We expect that this trend will continue throughout 2018 and 2019.
- Supply of target businesses – the New Zealand market typically lacks businesses that are of a scale sufficient to attract strong offshore interest. This has resulted in a rise in aggregation transactions involving the acquisition and combination of multiple businesses to achieve a greater scale. Aggregation transactions in 2017 include the establishment of early childhood education provider Provincial Education Group (and investment by Waterman Capital) and the reverse listing of Transport Investments Limited, an aggregation of various transport and logistics providers.
- Impact of bank regulation – As noted above, the implementation of recent changes in banking regulation in Australia and New Zealand is expected to lead to a number of further transactions in the banking sector where New Zealand’s major banks (which, being Australian owned, are indirectly subject to Australian banking regulation) will look to continue a trend of divesting non-core assets with a shift in focus to more traditional banking services. The general increase in regulation has also put constraints on banks’ willingness to fund acquisitions and growth, which has seen a rise in alternative capital providers available to fund the bridge between senior debt and equity.
What are the key means of effecting the acquisition of a publicly traded company?
The key means of effecting the acquisition of a publicly traded company are:
- through a court approved scheme of arrangement under the Companies Act; or
- by way of 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?
The information publicly available to a bidder in relation to a target company will depend principally on whether the company is subject to general reporting and disclosure obligations as a consequence of being large, overseas owned and/or listed on the NZX.
If a company is considered “large” for the purposes of the Companies Act and/or Financial Reporting Act, the relevant company is required to make its annual audited financial statements publically available through New Zealand’s companies register.
If a company is listed, the company is also obliged to release half year and full year reports to the market and is subject to continuous disclosure obligations in relation to any matters which may be considered material to the operation of the company.
With the exception of the above and certain other statutory information (for example, corporate registers), 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 undertaken by a bidder in the New Zealand market will typically vary based on the nature of the transaction, size and complexity of the target business and identity of the bidder, although an increase in the use of warranty and indemnity insurance in the New Zealand market is driving a need for bidders to undertake more comprehensive due diligence exercise.
Legal vendor due diligence is generally undertaken as part of a competitive sale process, but is less common on any transaction that proceeds by way of a bilateral negotiation or outside a formal sales process.
The level of due diligence undertaken in relation to a takeover transaction will depend on the nature of the transaction and co-operation of the target company. In the case of a scheme of arrangement, a full due diligence is more common as the transaction proceeds with the agreement of the target company board.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision making groups for any New Zealand incorporated company are the board of directors and, in relation to a limited scope of significant transactions, the shareholders.
In the event of a sale of a majority of the assets and business of a target company, shareholder approvals would be required:
- from 75% of the shareholders entitled to vote and voting on the transaction – where the transaction constitutes a “major transaction" 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?
The Companies Act imposes a range of duties on directors including, a duty to act in good faith and in the best interests of a company, a duty to act for a proper purpose and a duty not to allow a company to trade in a reckless manner.
In the context of a listed company, the Takeovers Code imposes further obligations on the directors and board of a target company that are largely procedural in nature, with the primary obligation being the preparation of a target company statement and provision of an independent advisor report which provide the directors’ view on the merits of the takeover.
Controlling shareholders of a target company do not have specific duties imposed on them.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Employees and other stakeholders do not have specific approval or consultation rights as part of any sale of the shares of a target company, except to the extent that such rights have been contractually agreed.
Where a transaction is structured as a business and asset acquisition, the relevant counterparties will be prohibited from assigning contracts of employment and employees will have various consultation rights that are set out in statute.
To what degree is conditionality an accepted market feature on acquisitions?
Transaction conditionality is typically directly related to the nature of the relevant transaction. For example, in the context of a competitive sale process, vendors will typically seek to resist conditionality and require that financing and other approvals are obtained prior to the execution of a binding agreement. Alternatively, conditions are likely to be more common in complex or high value transactions (particularly those in heavily regulated industries) or where the bidder has a greater level of control in the negotiations.
New Zealand regulatory conditions are generally widely accepted to the extent application. For example, overseas investment regulation, competition or specific industry regulations.
What steps can an acquirer of a target company take to secure deal exclusivity?
In the context of 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.
In a private M&A transaction, counterparties are not restricted from agreeing exclusivity arrangements or other deal lock-ups. Parties should consider the application of New Zealand’s competition laws in relation to procedural aspects of transactions between competitors.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Break-fees are occasionally used in transactions involving conditionality and are generally negotiated on a case by case basis. They are more common with transactions involving foreign bidders where overseas regulatory consents may be required as a condition to the transactions.
Which forms of consideration are most commonly used?
Cash or a combination of cash and scrip are the most common forms of consideration used in both public and private M&A transactions. The issue of debt securities or other means of deferred consideration are also often used in private M&A transactions.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
An acquirer will be required to make public disclosure once it becomes a substantial product holder in a listed company. An acquirer will be deemed to be a substantial product holder once it holds a relevant interest in 5% or more of the quoted voting products in a listed company. Acquirers will then need to provide a further public disclosure for each subsequent 1% increase in their relevant interest in the target company.
At what stage of negotiation is public disclosure required or customary?
For a takeover, public disclosure is required when the offer is made. Pre-bid agreements to accept an offer must also be disclosed and are therefore generally sequenced with the offer itself.
For a scheme of arrangement, disclosure typically occurs 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.
Disclosure of private M&A transactions is not required unless a relevant counterparty is subject to specific regulatory disclosure obligations.
Is there any maximum time period for negotiations or due diligence?
There is no maximum time period for negotiations or due diligence to take place. However, in the case of a listed target company, the board will be conscious of its disclosure obligations and will be more likely to make public disclosure as the period of negotiations or due diligence proceeds (given the heightened risk of the market becoming aware of the pending transaction).
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. In the context of a takeover, a board will obtain an independent advisor report that provides an independent assessment of the value of a target company and gives an indicative price range (although the results of that report will not be binding).
Is it possible for target companies to provide financial assistance?
Yes, financial assistance may be provided by a target company. Financial assistance would be uncommon in a takeover transaction, but is more common in a private M&A transaction or scheme of arrangement where the target company often provides security or other credit support in relation to a bidder’s acquisition funding arrangements.
Which governing law is customarily used on acquisitions?
New Zealand law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
A buyer of a listed entity will be required to prepare:
- a Takeover Offer and associated notices;
- if the consideration includes an offer of scrip, a Product Disclosure Statement in relation to the relevant securities being offered; and
- if the transaction is undertaken as a scheme, a Scheme Implementation Agreement; and
- various other procedural notices to the market and/or shareholders.
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 the execution of a share transfer form, which is then recorded in the company’s share register. It is not common for share certificates or other bearer instruments to be issued to shareholders. There is no stamp duties or similar taxes that apply to transfers of shares in New Zealand.
Are hostile acquisitions a common feature?
Hostile takeovers are not a common feature of the New Zealand M&A market and any hostile attempts in recent years have generally been unsuccessful.
What protections do directors of a target company have against a hostile approach?
Subject to certain limitations, the Takeovers Code prevents directors from undertaking defensive tactics in relation to a takeover. However, there is no restriction on directors actively soliciting competing bona fide offers from third 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, it must then make a full takeover offer (except where 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?
A minority shareholder has the usual shareholder rights that apply under the Companies Act, including the minority buyout rights available to dissenting shareholders, 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.