NGC buyout battle sparks call for changes to Companies Act

Friday 31st August 2001

By Nick Stride

The Law Commission is calling for changes to the Companies Act's controversial section 110 in the wake of the 15-month fight between Natural Gas Corporation and investor Infratil.

The act's "minority buyout" provisions allow shareholders to require a company to buy back their shares if the company wants to undertake a merger or major transaction the shareholder opposes.

They became law in 1993 but were not used until March last year when Infratil, which held a 6.7% NGC stake, invoked them after voting against NGC's proposed acquisition of a a controlling stake in electricity generator and retailer TransAlta.

NGC offered Infratil $1.30 a share, 1c more than the market price on the day other shareholders approved the acquisition.

Infratil argued it should be paid $1.81, the price on January 14 before the market knew NGC proposed to buy TransAlta. The decline to $1.29, it said, was caused by NGC offering too high a price.

After expensive and time-consuming legal action and arbitration NGC was ordered to pay $1.68, gaining Infratil $10.1 million on top of the $34.5 million it had already received.

Infratil was this year proved right when NGC was forced to write $255 million off the value of the power customers it bought. The provisions drew fire from numerous commentators, including the High Court's Justice John Doogue, who called them "defective" and "substantially flawed" and said they should be urgently reconsidered.

Among his criticisms were that the act was silent on the date at which the arbitrator should determine the "fair price" to be paid; that it didn't specify at what point during the buyout process title to the shares should transfer from the shareholder to the company; and that there was no requirement for the company to reveal to the shareholder the basis on which its offered price was calculated.

Among other submissions the commission has recommended that the act be changed to specify that the shares should be valued at the date the company gives notice it agrees to buy them. The price should be adjusted for any value change "arising from the accomplishment or expectation" of the proposed major transaction.

Contrary to Justice Doogue's ruling in the NGC case, the commission said title to the shares should pass to the company only when the final price had been decided and paid, not on payment by the company of its own "fair price."

The arbitrator should be given power to award legal and expert witness costs against the company. The commission's report is undergoing policy analysis.

ON THE WEB

* A free copy of the report, Minority Buy-Outs, can be downloaded free from the Law Commission's website http://www.lawcom.govt.nz

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