(delivering judgment of the court)
At the completion of the hearing of this appeal, the Court dismissed the appeal and indicated that reasons would be given at a later date. Costs were reserved.
As the shareholders’ meeting which the appellants sought to have adjourned from 2 pm on 6 March has now taken place, our reasons can be shortly stated.
Late last year, Fletcher Challenge Ltd ("Fletcher Challenge") filed a proceeding seeking the High Court’s approval to an arrangement under s 236(1) in Part XV of the Companies Act 1993. A major reconstruction of the companies within the Fletcher Group is proposed. It includes the sale of the Fletcher Challenge Energy Division to certain purchasing interests (Shell / Apache). The transaction is valued at just under $NZ5 billion.
A procedural application under s 236(2), which was made ex parte, was heard by Robertson J on 30 January 2001. The appellant, Greymouth Petroleum Mining Company Ltd (Greymouth), applied to be heard, but was refused. Robertson J made a number of orders, including a direction that Fletcher Challenge hold a special meeting of its shareholders to consider and, if thought fit, approve the arrangement for which the ultimate sanction of the Court will be sought. The learned Judge directed that the shareholders’ meeting be held at 2 pm on Tuesday, 6 March 2001. He made orders specifying the resolutions required to approve the arrangement, the method of voting, the manner and content of notices to be given of the special meeting, and the information to be provided to shareholders in advance of the meeting. The Judge directed that, if the proposal was approved by shareholders, the Court would consider Fletcher Challenge’s application for final approval of the arrangement on 15 March 2001.
On 26 February 2001, Greymouth lodged a belated proposal (involving Peak Petroleum Company of New Zealand Ltd as the purchasing entity) with Fletcher Challenge for the purchase of Fletcher Challenge Energy (the Peak proposal). The Peak proposal offered shareholders a minimum of $NZ3.70 per share. This offer was approximately $NZ300 million more than the Shell / Apache bid. Greymouth sought to make the Peak proposal identical to the Shell / Apache bid so that, as far as possible, it would not interfere with the restructuring of the companies within the Fletcher Challenge Group. Following notice of this proposal, Shell / Apache increased the cash component of its offer by approximately $NZ0.49 per share and Greymouth then increased the offer in the Peak proposal so that it now exceeds the Shell / Apache offer by $NZ0.35 per share.
At the same time as the Peak proposal was lodged with Fletcher Challenge, Greymouth asked the company to provide it with access for due diligence. To that end it also sought an adjournment of the shareholders’ meeting for 17 days to allow for the completion of due diligence and time for shareholders to be sent details of the Peak proposal. It therefore sought Fletcher Challenge’s support to vary the initial orders. The proclaimed intention of Greymouth in requiring due diligence and an adjournment of the meeting was to allow due diligence to be completed and to put it in the position of being able to make a binding and unconditional offer, subject only to regulatory approvals, shareholder approval and the sanction of Court, matters which were beyond Greymouth’s direct control. This course, it was thought, would provide shareholders with greater certainty relating to the Peak proposal when considering it in relation to the current Shell / Apache bid.
Subsequently, Greymouth made an alternative request to Fletcher Challenge for a short adjournment of the shareholders’ meeting to facilitate the communication of the Peak proposal to shareholders and to provide a mechanism by which the shareholders who had already cast their votes or lodged proxies could recast their votes or withdraw their proxies, as the case may be, once the additional information had been received.
Fletcher Challenge refused both requests. Based on the information with which it had been provided and the fact that the Peak proposal would be highly geared, Fletcher Challenge considered that the financial substance of Greymouth fell far short of that Shell / Apache. It took the view that an agreement with Greymouth on terms identical to the arrangement with Shell / Apache was out of the question. As Fletcher Challenge and its outgoing divisions would be exposed to an unacceptable credit risk, the company would require an indemnity for any liability incurred by it or the other divisions within the Fletcher Challenge Group properly attributed to Fletcher Challenge Energy. It would expect equity participants or financiers of the Peak proposal to provide guarantees in favour of Fletcher Challenge. Such a commitment had been given by Shell.
Further, Fletcher Challenge considered that the time within which it was anticipated an arrangement could be settled with Greymouth would expose the shareholders of Fletcher Challenge to at least three further months of uncertainty and the possibility of adverse movements in the New Zealand / US dollar exchange rate. The company did not believe that the due diligence sought by Greymouth could be completed within the time available before the date of settlement with Shell / Apache on 23 March, time being of the essence. If Fletcher Challenge failed to settle on that date it was open to Shell / Apache to terminate the arrangement.
Having been refused due diligence, Greymouth applied to the High Court for a variation of the initial orders and for a direction that due diligence be permitted. The application was heard by Anderson J on an urgent basis on 2 March 2001, and the learned Judge delivered his judgment orally on the same day.
THE JUDGMENT IN THE COURT BELOW
Anderson J took the view that Greymouth had not satisfied him that he should take the step of deferring a Court-ordered meeting, which was part of a complex arrangement requiring Court approval, and which would have the effect of endangering, if not destroying, the Shell / Apache bid. He considered that the shareholders’ meeting was concerned with the free choices of the shareholders and, as such, would be "democracy in action in a commercial context". It was for the shareholders to decide whether or not the resolutions should be passed. It was not for the Court to pre-empt that decision by making orders, seemingly procedural but which were essentially substantive in effect, which would preclude the shareholders from the opportunity to vote on the Shell / Apache bid, especially as that proposal could collapse as a consequence of the delay. He thought Greymouth was using the Court to obtain a commercial advantage in the expectation that the offer of Shell / Apache would be "squeezed out by the compression of time in consequence of a delaying order".
Anderson J further considered that there was no legal basis on which an order could be made compelling Fletcher Challenge to give due diligence in the absence of clear evidence that the board’s refusal to an "aspirant competitor" was a product of the "dereliction of responsibility by a director". He said that no such suggestion had been made and that, at this crucial time, acceding to the administrative demands of a due diligence operation on Fletcher Challenge would be a "foolish commercial decision". He concluded; "let due diligence wait unless and until it might be of actual value, rather than a commercial impediment".
The appeal came before this Court as a matter of critical urgency. Anderson J’s judgment was delivered orally on Friday, 2 March. Greymouth filed its appeal in this Court at 12.40 pm on Monday, 5 March. It sought an urgent fixture at 9 am on Tuesday, 6 March, the day of the shareholders’ meeting.
This Court took the view that, if at all possible, it should consider the appeal on the Monday. By the following day, that is, the Tuesday, interested parties would be acting upon the fact that the shareholders’ meeting was to proceed later in the day. The Court wished to avoid interfering with their arrangements should it decide not to allow the appeal. It therefore notified the parties that it would sit at 4 pm on the Monday.
While Mr Camp QC and Mr Mitchell, for Greymouth, were able to appear at that time, it proved impossible for the counsel and legal advisers for the respondents to do so. Consequently, a telephone link-up was arranged, and the hearing commenced at approximately 4 pm on the Monday. The hearing was not, however, completed. Counsel for Fletcher Challenge and Shell / Apache requested that they be given the opportunity to be heard on the Tuesday. This request was agreed to, and the Court resumed the hearing at 9 am on that day, the morning of the shareholders’ meeting.
Following argument, the Court announced its decision at 11.15 am as set out above.
THE COURT'S REASONS
As indicated, in the circumstances, it is unnecessary to canvass all the issues which were raised in argument. At the resumption of the hearing on the Tuesday morning the Court listed for counsel the various matters which it considered required further attention, and it will suffice to touch upon those specific matters. Those matters were as follows:
Greymouth’s allegation that it was "shut out" by Fletcher Challenge from obtaining information necessary to complete a firm bid.
Greymouth’s allegation that Fletcher Challenge was obliged to give shareholders notice of Greymouth’s resolution seeking an adjournment, and that the company failed to give that notice.
The question as to what specifically would be the detriment in adjourning the shareholders’ meeting until, say, 20 March, when the Shell / Apache settlement date was not until 23 March.
The question whether it was open to shareholders to vote for an adjournment and whether the proxies, both directed and open, would be able to be used to vote against an adjournment.
The question whether clause 5.6 of Fletcher’s agreement with Shell / Apache (and possibly other clauses) placed the board of Fletcher Challenge in what was effectively a position of conflict, and, if so, to what extent shareholders had been made aware of the company’s obligation or conflict as a result of that clause.
1. Greymouth's Allegation It Was "Shut Out"
We are not satisfied that Greymouth was "shut out" from undertaking due diligence, let alone in an improper manner or for an improper purpose. Stated shortly, Greymouth had not reached the point where it could be said that the board of Fletcher Challenge would be in default of its fiduciary obligations if it did not permit due diligence. The board understandably doubted Greymouth’s ability to complete due diligence within such a short period of time. It had taken Shell / Apache, with its existing knowledge, three months to complete a firm proposal. Due diligence and credit approval would also be required by the providers of debt finance. Even if due diligence could be completed, other matters, such as the internal approval procedure of a number of equity participants, the negotiation and execution of a formal agreement with Fletcher Challenge, the negotiation and execution of a contract relating to the acquisition of the Canadian and Argentinean interests of Fletcher Challenge Energy, and the regulatory approvals remained outstanding. During this time, completion of the separation of the other divisions of Fletcher Challenge would need to remain "on hold".
Nor was the funding in place. A high gearing was required and no more than an indication had been given that finance would be forthcoming, and certainly not forthcoming in the absence of due diligence to the satisfaction of the financier. We consider that it was reasonable for Fletcher Challenge to form the view that it was not obliged to agree to due diligence unless and until Greymouth had first obtained much firmer commitments from its equity and debt financiers to provide the requisite funding. It could not necessarily be satisfied that Greymouth had a genuine interest in, or real prospect of, acquiring the assets in question. Moreover, it is to be borne in mind that permitting due diligence would have allowed Greymouth to gain access to a number of sensitive commercial documents. It also would have required the company to expend a considerable amount of time and resources on diligence and negotiations with a party which it was not satisfied had the ability to complete the transaction.
2. Notice Of The Adjournment Resolution
We need not tarry too long on this issue. Mr Camp’s portrayal of the facts, with which he had impressed us on the Monday evening, proved on closer examination of the documents to be unpersuasive. Notice of a resolution for an adjournment was certainly given by Greymouth’s legal advisers to Fletcher Challenge. The discussions between the solicitors for Greymouth and Fletcher Challenge then followed and, although the date by which notice of the resolution would need to be given to shareholders was a matter of only days away, the notice was left in abeyance. At its highest, it can be said that there was a genuine misunderstanding between the parties as to whether the notice of the resolution for an adjournment was to be treated as being in abeyance. It is not necessary for us to resolve the dispute, but if it were so necessary, we would be inclined to accept the view put forward by Fletcher Challenge that the matter was left in abeyance. If that were not the position we would have expected Greymouth to have applied to the Court while time was still available, as it did on other occasions.
3. The Detriment In Adjourning The Meeting Until 20 March?
No satisfactory explanation was given to us as to why Greymouth chose to request an adjournment until 23 March, the very day on which the Shell / Apache transaction was due to be settled, if approved. No date could be more awkward. Mr Camp verbally varied the request to 20 March, and it was for that reason that we asked counsel for Fletcher Challenge and Shell / Apache, Mr Galbraith QC and Mr Farmer QC respectively, to focus on the possibility of a shorter adjournment.
We do not consider that this minor variation assists Greymouth. In terms of the due diligence required it seems quite unrealistic to be talking in terms of days. We accept Mr Camp’s point that Greymouth’s offer could not be made unconditional without due diligence. Its shareholders would rightfully expect that of the company. But whether due diligence carried out in such a short span of time would discharge its obligation is an open question. If Fletcher Challenge’s settlement with Shell / Apache was to proceed on 23 March so as to avoid the risk that the existing bid might be withdrawn, Greymouth had simply run out of time.
Further, it is clear that, even if Greymouth was able to complete due diligence by 20 March, it would be impossible for Fletcher Challenge to complete the settlement with Shell / Apache on 23 March. The hearing at which the final approval of the Court is to be sought is to take place on 15 March. Apparently, the application will be opposed by two other parties. Any order made would be too late for settlement to be completed on the 23rd. Finally, as pointed out by Mr Galbraith, Shell has allowed five days to effect an exchange of currency (in the order of hundreds of millions of dollars) from US to NZ dollars to fund the payment of the cash component of the purchase price. It would be deprived of those five days, or would be required to effect the exchange in a manner which could create adverse movements in the New Zealand / US exchange rates prejudicial to various interests, including the interests of shareholders. Further, under the Australian Stock Exchange Listing Rules, Fletcher Challenge would be required to cease trading in its shares five days prior to the completion of the arrangement. Under the New Zealand Stock Exchange Listing Rules the ten days notice required prior to the completion of the transaction had been reduced to a period of five days. It would not be possible to meet either of these requirements.
We concluded, therefore, that it was impractical to contemplate an adjournment until 20 March. To have done so may have put the Shell / Apache transaction at risk. Irrespective of Mr Camp’s scepticism, that possibility cannot be discounted and, consequently, we are not prepared to contemplate a short and possibly futile adjournment.
4. Voting On Proxies
Mr Galbraith was able to inform the Court that 115 m proxies were held by the company. Eighty-seven million proxies were directed, most in favour of the substantive resolutions, and 7 m proxies were open. Our fear on hearing Mr Camp the evening before was that the exercise of these proxies by the Chairman of Fletcher Challenge, or other holders of the proxies, could unfairly distort the vote should an adjournment be sought during the course of the shareholders’ meeting. Such a fear, of course, must assume that shareholders had sent in their proxies without being fully informed of the Peak proposal or that they had not had the opportunity to withdraw their proxy.
Mr Camp was ultimately unable to satisfy us that this possibility presented a real risk. The Chairman and directors of Fletcher Challenge are obliged to act in accordance with their fiduciary obligations. They would have been alert to their obligations in the event that there was a move to adjourn the meeting. Should the point prove significant, the exercise of the proxies can be examined when Fletcher Challenge seeks the Court’s final sanction to the arrangement.
5. Clause 5.6 Of The Agreement
It proved productive for us to explore the question whether, as a result of the terms of cl 5.6 of the agreement between Fletcher Challenge and Shell / Apache, the directors of Fletcher Challenger were effectively unable to discharge their fiduciary obligations. Mr Camp had advanced a strong submission to the effect that the board of Fletcher Challenge was in a position of conflict as a result of the terms of that clause.
Clause 5.6 of the agreement reads as follows:
Defence of proceedings
Fletcher Challenge and [Shell / Apache] will each vigorously defend, or will cause to be vigorously defended, any lawsuits or other legal proceeding brought against it or any of its Subsidiaries challenging this Agreement or the completion of the Arrangement or the transactions contemplated by this Agreement. Neither Fletcher Challenge nor [Shell / Apache] will settle or compromise (or permit any of its Subsidiaries to settle or compromise) any claim brought in connection with this Agreement, the Arrangement or any transaction contemplated by this Agreement without the prior consent of the other parties, such consent not to be withheld unreasonably.
In discussion during oral argument it also became relevant to refer to cl 12 of the Agreement. This clause reads:
Alternative transactions — non-solicitation
Until this Agreement is terminated, Fletcher Challenge will not, and will procure that its Subsidiaries and their directors, employees and agents will not, (directly or indirectly) solicit, initiate or knowingly encourage submission of proposals or offers from any person, who is not in an Affiliate of Fletcher Challenge, relating to any acquisition or disposition, directly or indirectly, of all or substantially all of the Fletcher Challenge Energy Shares or sale of all or substantially all of the assets of Fletcher Challenge Energy, or any take-over bid, amalgamation, merger, reorganisation, arrangement, recapitalisation, liquidation or winding up of, or other business combination or similar transaction involving, Fletcher Challenge Energy and any other person other than [Shell / Apache]. Nothing in this clause 12 will restrict the ability of the directors of Fletcher Challenge and its Subsidiaries to comply with their fiduciary duties.
Both provisions appear to have been overstated by Fletcher Challenge. Mr Andrews, the Chief Executive Officer of Fletcher Challenge, for example, deposed in an affidavit that the board of Fletcher Challenge is only able to provide other parties with an opportunity to undertake due diligence prior to the outcome of the shareholders’ meeting with the prior consent of Shell and Apache. He described this as a contractual obligation under the agreement, and recorded that Shell and Apache’s consent had not been forthcoming.
Clause 5.6 is drawn more narrowly than this argument indicates. It is designed to obtain Fletcher Challenge’s support should the arrangement be challenged in any legal proceeding. In other words, Fletcher Challenge cannot stand by while the agreement which it has solemnly entered into, and on which Shell and Apache are entitled to rely, is attacked as being invalid or ineffective. The present situation is quite different. Greymouth is seeking to make a rival bid. This is not to challenge the legal integrity of the arrangement between Fletcher Challenge and Shell / Apache in a legal proceeding.
It would also appear that Fletcher Challenge has adopted an extended view of its non-solicitation obligations under clause 12. The essential purpose of such a provision is to prevent a company which has entered into a firm arrangement from then using the bid contained in that arrangement to obtain a higher or better offer. The words "solicit, initiate or knowingly encourage" reflect this purpose. The clause would not therefore prevent Fletcher Challenge from permitting due diligence by another party where it has not solicited, initiated or knowingly encouraged that party’s approach. It would be absurd, to take an extreme example, if Fletcher Challenge were to be precluded from considering a later independent bid, which was doubly beneficial to the shareholders than that already received, when it had not solicited that bid. Permitting due diligence in such circumstances would not be to solicit, initiate or knowingly encourage the "submission of proposals or offers from any person". It would simply be to look after the shareholders’ interests. In any event, the point is put beyond doubt by virtue of the final qualification in the clause. Nothing in the clause is to restrict the ability of the directors to comply with their fiduciary duties.
Although we take the view, therefore, that Fletcher Challenge appears to have overstated the effect of these provisions, we do not consider that this error negates the direct evidence that Fletcher Challenge considered it was otherwise justified in refusing due diligence. Reliance on cls 5.6 and 12 seems to have come after the event as a justification for the company’s decision rather than being the reason for it. All in all, we do not consider that the conflict of which Mr Camp spoke was either particularly real or critical.
In any event, Mr Galbraith was alert to the reaction of the Court on this point and indicated that it would be drawn to the attention of the directors of Fletcher Challenge prior to the meeting.
It was for the above reasons that we decided to dismiss the appeal. The question whether the certainty and comprehensiveness of the Shell / Apache bid is to be favoured ahead of the higher but contingent Peak proposal was a question for the shareholders. We were not satisfied that the process by which they reach their decision would be distorted by the matters pressed on behalf of Greymouth in this appeal. Ultimately, the arrangement must be approved by the Court pursuant to s 236, and it will at that time be subject to the further scrutiny of the Court as contemplated by that provision.
Companies Act 1993: s.236
R Camp QC & P C Mitchell for Appellant (instructed by Phillips Fox,
A R Galbraith QC & R G Simpson & B D Gilbertson for First, Second, Fourth & Fifth Respondents (instructed by Bell Gully, Auckland)
J A Farmer QC & M A Crosbie for Third Respondent (instructed by Rudd Watts & Stone, Wellington).
M A Gilbert for Apache Corporation (instructed by Chapman Tripp, Auckland)
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