ABANO HEALTHCARE GROUP LTD v HEALTHCARE PARTNERS HOLDINGS LTD [2018] NZHC 817

ABANO HEALTHCARE GROUP LTD v HEALTHCARE PARTNERS HOLDINGS LTD [2018] NZHC 817[27 April 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-000798[2018] NZHC 817IN THE MATTER of a claim pursuant to r 49 of the TakeoversCodeIN THE MATTER of a counterclaim under the Companies Act1993BETWEEN ABANO HEALTHCARE GROUPLIMITEDPlaintiffAND HEALTHCARE PARTNERS HOLDINGSLIMITEDDefendantHearing: 16 – 20 April 2018Counsel: DJ Cooper and EF Armstrong for PlaintiffMR Crotty and AJ Nelder for DefendantJudgment: 27 April 2018JUDGMENT OF DOWNS JThis judgment was delivered by me on Friday, 27 April 2018 at 3 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Wilson Harle, Auckland.Russell McVeagh, Auckland.DJ Cooper, Auckland.Table of ContentsPara NoThe case [1]Background [4]The attempted takeover [11]The Code; r 49 in context [18]Canterbury Frozen Meat [32]A fresh look [43]How should r 49 be applied? [48]Properly incurred expenditure and "resisting" a takeover bid [59]The expensesForsyth Barr Ltd [68]Ms Jackie Ellis [74]Directors' fees [81]Legal fees [88]Remaining expenses [99]Orders [108]Addendum: objection to Mr Hinton's evidence [111]The case[1] Put broadly, a "takeover" of a company is when the company is acquired—with its blessing or otherwise—through the purchase of shares from its shareholders.Rules exist. These comprise the Takeovers Code (the Code). Rule 49(2) of the Codeprovides for the recovery of, from the offeror seeking to acquire the shares, "expensesproperly incurred by the target company in relation to ... a takeover notice".[2] Abano Healthcare Group Ltd (Abano) incurred unreimbursed expenditure of$429,007.55 in relation to a failed takeover attempt by Healthcare Partners HoldingsLtd (Healthcare Partners).1 It contends Healthcare Partners is liable to pay this sum.Healthcare Partners argues the related expenses were not properly incurred. Andexcessive.[3] Central to all this is a 1972 decision, Canterbury Frozen Meat Co Ltd v WaitakiFarmers' Freezing Co Ltd.2 In that case, Wilson J drew a distinction between expenses1 Abano's total expenditure was higher, but it "set-off" a dividend payable to Healthcare Partners asa (minority) shareholder of Abano. Healthcare Partners filed a counterclaim in relation to theset-off. The parties agreed at trial no adjudication is required on this issue, as it is largely moot.2 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd [1972] NZLR 806.of a target company countering arguments in favour of a takeover, and expensesdirected at "resisting a takeover bid".3Background[4] Abano operates, and invests in, healthcare and medical services businesseshere and Australia. The company is worth approximately $250 million. It is listed onthe New Zealand Stock Exchange.[5] Healthcare Partners was incorporated in November 2016 to make a partialtakeover offer of Abano's shares. Healthcare Partners held 19.02 percent of Abano'sshares. It wanted to acquire a controlling shareholding of 50.01 percent.[6] Healthcare Partners is owned by interests associated with its directors,Mr Peter Hutson, Mrs Arnia Hutson and Mr James Reeves. Mr Hutson was directorof Abano from 2008 until late 2013. During that year, Mr Hutson, Mrs Hutson andMr Reeves explored the possibility of acquiring Abano with an Australian firm.Mr Hutson considered Abano's Board of Directors—and Abano—were notperforming. The Board disagreed, both in relation to performance and desirability ofacquisition. A takeover in conjunction with the Australian firm was then mooted.Nothing eventuated, but the relationship between Abano and Mr Hutson soured.Mr Hutson resigned as a director at the request of the Board on 19 September 2013.[7] From November 2013, Mr Hutson and Mr Reeves agitated for change (asshareholders) in relation to Abano on the bases it was underperforming and poorly led.Misreporting was implied. Mr Hutson and Mr Reeves said Abano had "demonstratedincreasing disregard for the truth"; likewise, its directors in relation to their "fiduciaryduties". An independent report was dismissed as "fundamentally flawed". Reliability"and accuracy" of market information were questioned.[8] In 2014, Mr Hutson and Mr Reeves gave Abano's chairman, Mr Trevor Janes,an ultimatum: encourage Abano's sale or resign. When Mr Janes did neither,Mr Hutson and Mr Reeves called for his resignation. Mr Reeves told assembled3 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd¸ above n 2, at 811.shareholders Mr Janes lacked "requisite skills"; Abano had incurred a "debtmountain"; and the company had a pattern of producing "misleading" information.Mr Reeves described a recent Abano newsletter as "a sick joke". Mr Hutson said arecent valuation of the company was neither credible nor accurate. The motion toremove Mr Janes failed.[9] Other instances of public acrimony need not be recorded. It is sufficient toobserve those connected to Healthcare Partners have been steadfast in their viewAbano requires change in relation to both governance and direction. Abano considersthese criticisms unfair and misleading. This judgment is not a referendum on whichview is correct.[10] Such is the context for the attempted takeover.The attempted takeover[11] On 4 November 2016 Healthcare Partners gave notice—as required by theCode—of its intention to make an offer to acquire 30.99 percent of Abano's shares.Abano contended the notice was invalid. Healthcare Partners issued a second noticeon 7 November 2016. Again, Abano objected to its validity. On 24 November 2016Healthcare Partners issued a third notice. Healthcare Partners initially offered $10per share. It later increased its offer to $10.16 in recognition of an Abano dividend of16 cents per share.[12] Abano's Board quickly reached the view the offer was not in Abano's bestinterests or that of its shareholders.4[13] From 30 November 2016, Abano sent invoices, initially without supportinginformation, to Healthcare Partners in relation to its takeover notice. HealthcarePartners did not respond.4 Healthcare Partners notes this conclusion was reached before Abano obtained the independentadvisor's report. True, but its early communication(s) to shareholders did no more than advisethem to wait until that report was available.[14] On 14 December 2016 Abano published, as required by the Code, a targetcompany statement. Abano recommended its shareholders reject Healthcare Partners'offer.[15] On 23 January 2017 Abano announced it had "set-off" the dividend payable toHealthcare Partners, given the latter's non-payment of Abano's takeover noticeexpenses.[16] On 26 January 2017 Abano issued a statutory demand in respect of itsremaining expenses, which it later withdrew. Healthcare Partners extended its offeruntil March.[17] On 3 March 2017 the offer expired. And failed. Healthcare Partners receivedacceptances for only 3.56 percent of Abano's shareholding. Healthcare Partners beata retreat. On 18 August 2017 it sold all of its shares in Abano.The Code; r 49 in context[18] Section 19 of the Takeovers Act 1993 envisages, and provides for, the Code.The Takeovers Act formed part of a package of company law legislation, including theCompanies Act 1993 and Financial Reporting Act 1993, designed to modernisecorporate law.[19] The Code came into effect on 1 July 2001. It applies to code companies—inpractice, those on the New Zealand Stock Exchange—and companies of 50 or moreshareholders.5 Before its advent, takeovers were only loosely regulated.[20] The Code creates "the fundamental rule".6 The rule prevents any personbecoming the holder or controller of more than 20 percent of the voting rights in acode company. The rule is subject to exceptions. The first exception is when anofferor seeks to acquire a code company through a "full offer": acquiring all shares inthe company.7 A second exception is when the offeror makes a "partial offer" in5 Takeovers Code, r 3A(1).6 Rule 6.7 Rule 7(a).relation to the code company's shares—the situation here.8 Both require the offerorto give notice.9[21] A partial offer must be for a "specified percentage" of the shares in the targetcompany.10 If the offeror does not already hold or control more than 50 percent of thecompany's shareholding, the specified percentage must bring the offeror such control.The facts offer a convenient example. Healthcare Partners held 19.02 percent ofAbano's shares. To acquire a controlling shareholding, it needed an additional30.99 percent, the proportion sought.[22] Partial offers are uncommon. And, complex. If the offeror receivesacceptances for shares greater than the specified percentage, the Code contains amechanism for scaling acceptances. So, shares are acquired from each acceptingshareholder on a pro rata basis to achieve the specified percentage.11 If scaling occurs,every accepting shareholder sells some, but not all shares.[23] To use this case as an example, if 40 percent of shareholders had agreed toHealthcare Partners' offer, scaling would take effect because:(a) It already owned 19.02 percent of Abano's shares.(b) Its offer related to an additional 30.99 percent of Abano's shares.(c) There would be surplus acceptances of 9.01 percent. These would beoffset against all acceptances on a pro rata basis.[24] Partial offers have price implications. In a takeover situation, an offerorexpects to pay a premium for obtaining control of the target company. Consequently,its offer price is often much higher than the target company's (share) trading price.Scaling, however, can affect the premium. Using the example above, everyone whoagreed to sell shares to Healthcare Partners at the (original) offer price of $10 would8 Takeovers Code, r 7(b).9 Rule 41.10 Rule 9.11 Rules 12 and 14.not be able to sell all their shares because of scaling, with the result the $10 pricewould, obviously, only attach to those shares actually purchased by HealthcarePartners. Moreover, the value of the remaining shareholding might fall, as it wouldconstitute a minority one only. Similarly, the target company would be under thecontrol of the offeror, and subject to its untested vision.[25] The directors of a target company in relation to either a full or partial offermust obtain a report from an independent advisor on the offer's merits.12 Theindependent advisor must be approved by the Takeovers Panel, a specialist bodyestablished as a Crown entity under the Takeovers Act.[26] A target company has other obligations as well. It must, within 14 days of thedispatch of the takeover offer, prepare and send to shareholders a "target companystatement".13 The statement must contain a variety of information, including thedirectors' recommendation in relation to the offer, and the independent advisor'sreport.14[27] A target company is not precluded from resisting a takeover—a topic on whichthe Code is silent—but it may not engage in "defensive tactics".15 Rule 38(1) of theCode provides:If a code company has received a takeover notice or has reason to believe thata bona fide offer is imminent, the directors of the company must not take orpermit any action, in relation to the affairs of the code company, that couldeffectively result in—(a) An offer being frustrated; or(b) The holders of equity securities of the code company being denied anopportunity to decide on the merits of an offer.[28] The Takeovers Panel has issued a Guidance Note on its approach to r 38. TheGuidance Note cites as examples of impermissible defensive tactics:(a) Acquiring or disposing of a major asset.12 Takeovers Code, r 21.13 Rule 46.14 Schedule 2.15 Rule 39 creates exceptions to the prohibition of defensive tactics.(b) Incurring a material new liability or making a material change to anexisting liability.(c) Declaring an abnormally large or unusual dividend or other form ofcapital distribution.(d) Undertaking material issues of new shares or re-purchases of existingshares or material issues of convertible securities.(e) Entering an agreement with a third party that confers material economicbenefits on the target company which are available only to oneparticular bidder.(f) Acquiring an asset that would render the offer subject to regulatoryapproval (for example, under the Overseas Investment Act 2005).[29] The Code contains a broad prohibition on misleading and deceptive conduct.Rule 64 provides:Misleading or deceptive conduct(1) A person must not engage in conduct that is—(a) conduct in relation to any transaction or event that is regulated bythis code; and(b) misleading or deceptive or likely to mislead or deceive.(2) A person must not engage in conduct that is—(a) incidental or preliminary to a transaction or event that is or is likelyto be regulated by this code; and(b) misleading or deceptive or likely to mislead or deceive.The rule bears obvious similarity to s 9 of the Fair Trading Act 1986.[30] As to r 49(2), it provides:Reimbursement of directors and target company.(2) The target company may recover from the offeror, as a debt due to thetarget company, any expenses properly incurred by the target company inrelation to an offer or a takeover notice, whether as a result of refundsmade under sub-clause (1) or otherwise.[31] New Zealand is apparently unique in permitting a target company to recovertakeover expenses from an offeror. The rule can be traced to s 11 of the CompaniesAmendment Act 1963, and remains materially unchanged. Australia eschewed ourapproach in 1969 out of fear it implied "an offeror is in the wrong" in making atakeover.16 Extrinsic legislative material offers little insight on how the provision wasintended to operate. Which leads to the only case directly on point.17Canterbury Frozen Meat[32] Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd involveda claim for the recovery of approximately $27,000 under s 11(2) of the CompaniesAmendment Act 1963.18 In 1968, Waitaki Farmers' Freezing Company sought toacquire Canterbury Frozen Meat Company. By April 1969, its bid had failed.Canterbury Frozen Meat Company engaged a host of advisors to resist the takeover:solicitors, a business consultant, a chartered accountant, an auditor, and a publicrelations consultant.[33] Wilson J gave a brief oral decision. The Judge then released a written judgmentas his oral decision had been "a rash undertaking";19 some of his language was"per incuriam"; and, to do "justice to the excellent argument" of counsel.2016 Company Law Advisory Committee (Aust) Second Interim Report: Disclosure of substantialshareholdings and takeover bids (Commonwealth Government Printing Office, Canberra, 1969)at [45].17 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd, above n 2. CanterburyFrozen Meat was applied by Master Thomson in Exicom Staff Investments Ltd v VentureDevelopers Ltd HC Wellington M200/01, 26 February 2002.18 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd, above n 2.19 At 807.20 At 812.[34] The Judge closely analysed the 1963 legislation. He considered nothing in theAct encouraged or discouraged the acceptance of an offer. Rather:21Everything points to the legislature's intention [shareholders] should beenabled to make a proper decision in their own interests, based on adequateinformation.[35] A "single consistent test" could be discerned.22 If an expense under s 11(2)was "incurred for the purpose of ensuring that the [shareholders] have a free andinformed choice to accept or reject the offers it is recoverable".23 However, if theexpense was "incurred for any other purpose, it is not".24[36] The Judge identified several categories of recoverable expenditure:25It follows, then that the expenditure which an offeree company may recoverunder s 11(2) would include the following categories:1. Expenditure incurred in and incidental to the fulfilment of its obligationsunder s 5 and s 7(2) of the Act.2. Expenditure incurred in countering propaganda by the offeror which iscalculated to influence the offerees' choice.3. Expenditure incurred otherwise for the purposes of safeguarding theofferees' interests in relation to the scheme, as (for instance) in keepingthem informed of developments which might affect the value of theshares.4. Expenditure incurred in reimbursing directors under s 11(1).[37] Category 2 remains self-explanatory, and is consistent with preservation offreedom of shareholder choice. So too category 3. However, categories 1 and 4 arebroad, and potentially unconnected to the posited test. Indeed, category 1 involvesmore technical requirements; target company obligations vis-à-vis notices and the like.It follows Wilson J's schema does not necessarily sit comfortably with a "singleconsistent test".21 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd, above n 2, at 810.22 At 812.23 At 812.24 At 812.25 At 813.[38] But the test had reach. The Judge drew a distinction between expenses of atarget company countering arguments in favour of a takeover, and expenses directedat "resisting a takeover bid".26 The former was "proper" and recoverable as protecting"informed freedom of choice"; the latter improper and not.27 The Judge said: "[t]hereis nothing in the Act to indicate that, in a war between an offeror and an offereecompany for control of the latter, reparations are payable by an unsuccessfulofferor".28[39] The Judge acknowledged his oral decision might have suggested otherwise, atleast when the target company was to be "put out of business" by the offeror.29 Buthaving examined the Act, the Judge considered nothing therein implied "the expenseof resisting a takeover bid" was recoverable.30 Rather, this was "a normal businessrisk".31[40] The Judge also offered broader guidance on when an expense was allowable:32(a) The claimant must establish the expense: "comes under one of the fourcategories of expenditure previously listed"; "it was reasonable to incurexpenses by engaging in that kind of activity; [and] it was reasonableto spend that amount on that kind of activity".(b) Reasonableness was to be assessed "with reference to thecircumstances obtaining at the time when it was incurred and will notlimit either the kind or the amount of expenditure to what, in the lightof events, provide to be strictly necessary."(c) The Court was not to be "an auditor or a taxing master"; it would allowproper expenses "on broad lines rather than by scrutinising every dollarand cent expended".26 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd, above n 2, at 811.27 At 810.28 At 812.29 At 812.30 At 812.31 At 812.32 At 815.[41] The Judge's observations at (b) imply the identified categories of expenditureare not closed. Those at (a) imply otherwise.[42] Wilson J allowed some expenses, dismissed others, and allowed some in part.A fresh look?[43] The parties agree recoverability turns, at least in part, on whetherCanterbury Frozen Meat should be applied or revisited. Abano submits the case is notfree from difficulty. And, even if correctly decided in 1972, re-appraisal is warranted;much has changed since then. Healthcare Partners contends Canterbury Frozen Meathas stood the test of time, particularly as the rule has not changed. Indeed,maintenance of its language is likely attributable to the case.[44] The argument for Healthcare Partners would have force if Canterbury FrozenMeat had been in mind when r 49 was lifted from the 1963 Companies AmendmentAct. But there is nothing to suggest it was. The report to the Minister of Justice inrelation to the draft Code said nothing about Canterbury Frozen Meat.Or, recoverability of expenditure. Materially, the report was prepared by theTakeovers Panel, the specialist body in this context.[45] Changed circumstances mean r 49 is ripe for fresh appraisal. Takeovers wereonly loosely regulated when Canterbury Frozen Meat was decided; now there is anembracing code. Much else has happened since 1972 too. The corporate legislativeenvironment is very different. Think, for example, of the Securities Act 1978, theSecurities Markets Act 1988, the Companies Act 1993, and the Financial ReportingAct 1993. Consequently, the corporate environment is now more regulated. Andcomplex. Both attract cost.[46] The Takeovers Panel has identified other changes since the advent ofCanterbury Frozen Meat:33(a) Greater expectations on company directors by shareholders.33 Takeovers Panel, "Code Word" No 24, December 2008 at 3.1.(b) Greater public scrutiny of the performance of target company directors.(c) A more litigious commercial environment.[47] All of this suggests a fresh look is necessary.How should r 49 be applied?[48] As will be recalled, r 49(2) provides:Reimbursement of directors and target company(2) The target company may recover from the offeror, as a debt due to thetarget company, any expenses properly incurred by the target company inrelation to an offer or a takeover notice, whether as a result of refundsmade under sub-clause (1) or otherwise.[49] Five things will be noted about the text.[50] First, use of the term "any" implies full recovery of properly incurredexpenditure. The rule could have been framed with reference to categories ofexpenditure. It was not. Consequently, a target company may recover all its properlyincurred expenses in relation to an offer or a takeover notice.[51] Second, expenses must be "properly incurred" (by the target company) inrelation to an offer or takeover notice. Self-evidently, other expenditure is notrecoverable. A distinction between the two is anticipated, and created. More aboutthis shortly.[52] Third, the same phrase implies expenses must be reasonable. The rule couldnot, for example, envisage the engagement of a consultant with an instruction—explicit or otherwise—to charge as much as he, she or it liked on the basis the expensewould be borne by the offeror. Similarly, to be "properly" incurred, the expense mustbe proportionate. Abano offered the helpful example of nationwide televisioncommercials by the target company as a means of communicating with shareholders,which, it accepted, would be a disproportionate expense. The relevant opinion inrelation to a takeover is that of shareholders, not that of the nation.[53] Reasonableness and proportionality should, however, be assessed withreference to circumstances at the time and not comfort of hindsight. The latter wouldbe inconsistent with full recovery, the rule's animating premise.[54] Fourth, properly incurred expenditure must be "in relation to an offer or atakeover notice". Other expenditure, even if it occurs simultaneously, is notrecoverable by the target company.[55] Fifth, the phrase "in relation to" is broad and compendious. Usage impliesrecoverability of (properly incurred) expenses by the target company in relation to thetakeover process as against, for example, recoverability of compliance costs vis-à-visthe takeover notice itself. Healthcare Partners did not contend otherwise.[56] As observed, extrinsic legislative material offers little insight on purpose.However, purpose is discernible from the Code itself, which places considerableresponsibilities on a target company. It, through its directors, must obtain a reportfrom an independent advisor on the merits of the offer. Similarly, the target company'sdirectors must make a formal recommendation to shareholders whether to accept theoffer. Both must be prepared and conveyed quickly; within 14 days of the dispatch ofthe takeover offer.34 All of this occurs within a strict regulatory environment, and inthe context of heightened public scrutiny of corporates and directors. For thesereasons, target companies are likely to require help from not inexpensive advisors,analysts, consultants and experts, all within a potentially tight timeframe.[57] Rule 49(2) recognises as much. It also recognises such cost "can be quitedisproportionate to the size or assets of the target company."35 In short, r 49(2)acknowledges properly incurred expenditure in relation to a takeover notice is not anormal incident of the target company's business, and hence not an expense the targetcompany should bear. It follows—as the Takeover Panel has observed—the ruleshould be "applied in a manner which reflects the realities of a modern takeover andenables all properly incurred expenses to be recovered".3634 Takeovers Code, r 46 and Sch 2.35 Takeovers Panel, "Code Word" No 24, December 2008 at 3.3.36 At 3.3.[58] Contrary to the view in Australia, none of this implies "an offeror is in thewrong". Rather, it is to consider fair that extraordinary cost is better placed on theparty seeking to obtain corporate control.Properly incurred expenditure and "resisting" a takeover bid[59] What then is the boundary of "properly incurred" expenditure? As will berecalled, in Canterbury Frozen Meat Wilson J held expenditure to resist a hostiletakeover not properly incurred, whereas expenditure to inform shareholders of thedirectors' point of view, including "propaganda" to rebut that of the offeror, properlyincurred.37 Healthcare Partners contends the distinction should be maintained,essentially because of the vitality of the reasoning in that case. Abano contends thedistinction is difficult to apply in practice and wrong in principle:The directors of a target company are entitled and obliged to form a view onthe merits of the offer. They are entitled and obliged to advise shareholdersof that opinion. Where the directors form a clear view that an offer is not inthe best interests of shareholders (and/or the target company), the directors areentitled to seek to persuade shareholders to that view.Whenever this occurs, there will necessarily be two parties with differentviews, each seeking to persuade shareholders accordingly. The offeror will ofcourse be promoting its offer and seeking to persuade shareholders of thebenefits of acceptance. The target directors will seek to do the same toadvance their different view that it is in the interests of shareholders to rejectthe offer. It is fully to be expected that each side will use all available meansto communicate its message effectively and forcefully. Neither side is actingimproperly in taking any of those steps (providing, of course, that they do notbreach rule 64 of the Code).[60] The distinction is at best elusive. As Abano submits, the view a takeover is notin the shareholders' best interests is inseparable from the view a takeover should berejected, and in turn inseparable from so-called target company "resistance". Theobvious example arises when a target company engages a public relations consultantto communicate the company's view to shareholders. Such engagement, and all thatfollows, can be characterised as resistance to a takeover when the brief is to highlightwhy the takeover should be rejected. But this is only because the directors of the targetcompany reasonably believe it is in the best interests of the company—and its37 Canterbury Frozen Meat Co Ltd v Waitaki Farmers' Freezing Co Ltd, above n 2, at 813.shareholders—to do so. Consequently, actions to "resist" a takeover and those to"preserve" shareholder choice are typically coterminous and indistinguishable.[61] This is the experience of those in the field. Abano called Mr Peter Hinton, asenior corporate lawyer and company director, as an expert witness. Mr Hinton hasconsiderable experience with takeovers, and has acted for both target companies andofferors. His evidence was illuminating:The Court:Q. Mr Hinton, you don't directly address the issue of public relationsconsultants or companies in your testimony. Am I right to think that ifthere is a takeover notice, partial or otherwise, and the takeover isregarded as hostile, that can give rise to something of a public relationswar?A. Yes.Q. How common is that in your experience?A. Invariably common, or invariable.Q. And is that because the acquiring party and the target company is eachseeking to advance, perhaps aggressively, its perspective as to where thebest interests of the shareholders lie?A. Yes, I think that is the same as persuading the shareholders to their pointof view.Q. You'll be aware no doubt that Wilson J, in Canterbury Frozen Meat, acase decided some time ago, reached the conclusion that expenses forresisting a takeover bid are not recoverable, and might I be right inthinking that the distinction between resisting a takeover bid andinforming shareholders about the undesirability of a bid could be a veryfine distinction in practice?A. You would be entirely correct on that, we have struggled with that inpractice.Q. Might it on occasions be gossamer thin?A. It could be thin to the extent that one could claim to be under one andmotivated by the other.[62] A related difficulty arises. Evidence of "resistance" will almost always beavailable when a takeover is hostile. And if a test for non-recoverability, much timewill be spent examining—and then arguing about—target company correspondence,especially entrails of email, with a view to establishing the correct taxonomy ofassociated expenditure. This has resource implications for those involved. AndCourts.[63] The boundary of properly incurred expenditure should, instead, be determinedwith reference to the Code. Materially, it says nothing about "resisting" a takeoveroffer. The Code does, however, prohibit defensive tactics and misleading or deceptiveconduct; see the discussion at [27]–[29]. These behaviours do not give rise torecoverable expenditure for the obvious reasons the target company should not beengaging in them, and to permit recovery for such expenditure would be contrary topublic policy as expressed by the rules of the Code.[64] These prohibitions did not exist at the time of Canterbury Frozen Meat.Indeed, it is entirely possible Wilson J drew the distinction in question with a view todiscouraging conduct now regulated by the Code, in what was then only a looselyregulated environment.[65] To recapitulate, the true boundary between properly incurred expenses andother unrecoverable expenses lies not with an elusive common law distinction, butrather with articulated behaviours expressly prohibited by the Code: defensive tacticsand misleading or deceptive conduct. It follows conduct hitherto regarded as"resisting" should not, without more, disqualify as unrecoverable otherwise properlyincurred expenditure of the target company in relation to an offer or takeover notice.[66] For completeness, the Takeovers Panel appears to have reached the sameview:38Expenses for resisting a takeover bid4.10 In Canterbury Frozen Meat the Court took the view that expensesincurred for the purpose of resisting a takeover bid are not recoverable.In the Panel's view, a distinction needs to be made between:• First, expenses incurred by the board of the target company inresisting a bid by engaging in defensive tactics which are notpermitted by rule 38 of the Code. The Panel considers that theseexpenses are what the Court considered as being not properly38 Takeovers Panel, "Code Word" No 24, December 2008 at 4.10 and 4.11.incurred in Canterbury Frozen Meat. These expenses, which mayinclude items such as the costs of sale of key assets, are notrecoverable under rule 49(2); and• Second, expenses incurred by the board of the target company inresisting a takeover bid considered by the board not to be in theinterests of shareholders of the target company. These expenses,mostly related to communications with shareholders, should berecoverable under Category 2 above, as they are incurred in tryingto ensure that shareholders are fully informed when making adecision as to whether to accept or reject a takeover offer. Thereshould be clear justification for employing the use of PR consultantsand/or public notices in substitution for, or in addition to, directcommunication with shareholders.4.11 Expenses incurred in resisting a bid are not always easily identifiableas falling within either of these categories. Whether they are properlyincurred will turn on an objective view of the reason why they wereconsidered by the board to be necessary.[67] Now the disputed expenses.The expensesForsyth Barr Ltd[68] It is common for a target company to seek advice and assistance from aninvestment bank. Abano promptly retained Forsyth Barr Ltd (Forsyth Barr).Forsyth Barr's engagement letter of 4 November 2016 recorded its anticipatedservices:As Financial Adviser, Forsyth Barr will assist Abano in deciding on theappropriate response to the takeover offer. Key components of the role wouldlikely involve the following:(a) assisting in the development and refinement of Abano's financial modeland forecasts to be used by the independent expert;(b) assisting the Company and its legal advisors in updating the Board ofthe Company in relation to the Transaction and in preparing anynecessary Board papers, including valuation advice;(c) assisting the Company's legal advisors in the preparation of a targetcompany statement and other relevant documentation ("TransactionDocuments") and liaising with the independent appraiser;(d) assisting the Company to develop and implement an effectivemarketing and communication strategy with the Company'sshareholders and the market in relation to the Transaction;(e) providing the Company with regular market feedback in relation to theTransaction including daily updates and analysis on trading in Abanoshares;(f) assisting in liaising with the bidder and their advisers; and(g) providing any other advice to the Company as required and mutuallyagreed between the parties.Mr Richard Keys, Abano's Chief Executive Officer, gave evidence Forsyth Barrprovided these services, save perhaps (f).[69] Healthcare Partners contends the full amount of Forsyth Barr's fee—aboutwhich more shortly—is not recoverable as Forsyth Barr was engaged to resist thetakeover. Healthcare Partners notes two pieces of correspondence from Forsyth Barrto Abano referred to "the takeover defence role", the "defence strategy" and to"rebutting the points made in the draft takeover document".[70] Other than the identified references, there is no evidence Forsyth Barr didanything other than the tasks identified in its engagement letter.39 All of those relatedto the takeover offer and were, on their face, recoverable. Moreover, even if ForsythBarr had a role in resisting the takeover, which is not established on the evidence, sucha role is not necessarily incompatible with otherwise properly incurred expenditure;see [59]–[66].[71] Forsyth Barr's fee was $375,000.40 It comprised a fixed fee of $100,000 permonth for three months, and then a monthly fee of $75,000 for one month. Mr Keysrefused to commit Abano to paying Forsyth Barr a success fee, by which Forsyth Barrwould have received a handsome sum if a new bidder completed a takeover of Abanowith the latter's support.[72] Healthcare Partners contends the fee is excessive. It submits Mr Key's stancein relation to the success fee likely contributed to a higher monthly premium, as39 Mr Hinton said reference by investment banks and others to a "defence" role is common; while itcould refer to "complete opposition" to a takeover, equally such usage could reflect "Americanparlance where they do talk about takeover defence".40 Plus disbursements.evidenced by Forsyth Barr's 2013 fee of $20,000 (to prepare a valuation model inrelation to Mr Hutson's proposed purchase with the Australian entity).[73] I consider Forsyth Barr's fee reasonable. True, Most New Zealanders couldnot afford it. However, the context is a large corporate one; Abano was and remainslisted on the New Zealand Stock Exchange:(a) Mr Hinton said in his experience, Forsyth Barr's fee was "well withinthe normal range of fees paid by target companies to investment banks".And, "at the lower end of [the] range for a takeover offer of this nature".I accept this evidence.(b) Healthcare Partners retained its own investment bank to assist it inrelation to the proposed takeover. Its amended fee was more than$3 million (payable if the takeover offer succeeded).(c) Forsyth Barr's 2013 fee has only modest relevance. That work wasmore confined as a takeover offer had not been made.(d) Mr Keys attempted to negotiate a lower fee with Forsyth Barr, but wasunsuccessful. Contrary to Healthcare Partners' submission, this is a nota case in which the target company accepted a hefty fee from aninvestment bank in the knowledge another would pick up the tab.Ms Jackie Ellis[74] Abano engaged Ms Jackie Ellis of Ellis & Co to provide public relationsservices. Ms Ellis specialises in investor relations communications for corporateclients. Her fee was $67,137.01. Mr Hinton said a "public relations war" is"invariable" in this setting. Healthcare Partners' retention of its own public relationsconsultants underscores the accuracy of this observation.[75] Healthcare Partners contends approximately half of Ms Ellis' fee should not berecoverable as much of her work was directed at defeating the takeover offer from theoutset. Healthcare Partners argues Ms Ellis and Abano adopted "an aggressive defencestrategy", in which Mr Hutson and Mr Reeves were portrayed, among other things, as"dissident shareholders" and "agitators".[76] This characterisation is available to elements of the evidence. For example, on12 November 2016 Abano and Ms Ellis corresponded about the desirability ofMr Hutson and Mr Reeves being seen in the manner above, without such portrayalemerging "from company spokespeople". Internal Abano email in December that yearand January the next imply the company contemplated portraying Healthcare Partnersas "bad debtors", but the approach was not pursued with Ms Ellis or publicly.[77] The submission fails. Abano acted this way because it reasonably believed itwas in its shareholders' best interests to reject the offer. Mr Hutson and Mr Reeveshad been sharply critical of Abano; see [6]–[9]. And, their takeover offer vis-à-visHealthcare Partners' was yet another chapter in the story. As observed earlier,resistance to a bid is typically coterminous and indistinguishable from preservation ofshareholder choice.[78] In any event, Ms Ellis' communications to shareholders were balanced. Thereis no suggestion anything she published on behalf of Abano was misleading ordeceptive.[79] Healthcare Partners observes not all proposed communications were publishedby Ms Ellis; Ms Ellis was used to provide communications to Abano's staff about theoffer; and much time was spent in ensuring published communications had the rightlanguage. None of this is surprising, or unreasonable. Abano had to ensure none ofits language was misleading or deceptive; its messages necessarily had many authors;and those to staff formed only a small proportion of the cost. Focus remained onshareholders.[80] Materially, Healthcare Partners has not identified any disproportionateadvertising. Ultimately, its complaint reduces to the proposition Healthcare Partnersshould not have to pay for Abano's successful public relations campaign. However,r 49 proceeds on the assumption exceptional (reasonable and proportionate) cost isbetter borne by the offeror.Directors' fees[81] Directors' fees in relation to the takeover offer total $74,400. Abano'sshareholders had, since 2007, approved an annual pool of funds for additionalremuneration of directors' extraordinary duties. Healthcare Partners contends"takeovers are part of the ordinary course of business for a Code company"; therefore,no allowance should be made for them.[82] The submission has some support from the Takeovers Panel. Its GuidanceNote in relation to expenses observes additional directors' duties in relation to atakeover offer are "an ordinary risk of holding office",41 though it may be "proper andreasonable" for additional compensation of directors if a takeover offer attracts "legaland commercial complexity".42[83] As observed earlier, r 49(2) proceeds on the assumption cost in this context ismore fairly borne by the offeror. No reason exists to draw a distinction in relation todirectors' fees, particularly given:(a) The undisputed expert evidence of Mr Hinton that "takeovers blowdirectors and their lifestyles out of the water in ways that no othertransaction or dealing that I have experienced can".(b) The decision by Abano's shareholders to create and maintain a pool offunds for extraordinary directors' duties.[84] But like other expenses under r 49, directors' fees must be reasonable andproportionate. And, these must reflect truly additional attendances resulting from thetakeover or attempted takeover.[85] Healthcare Partners contends there is no credible basis to determine how muchtime Abano's directors expended, for, Mr Keys asked for this information late in thepiece.43 True, this exercise was conducted largely after the fact. However, that does41 Takeovers Panel, "Code Word" No 24, December 2008 at 4.22.42 At 4.23.43 The issue was first raised at an Abano board meeting on 27 February 2017.not make it unreliable. Mr Keys asked the directors for their additional time, whichhe calculated as a percentage of their ordinary duties over the period of the takeover.The proposed fee was then ameliorated to ensure it was conservative. Suchmethodology is unobjectionable.[86] Healthcare Partners notes an email in the relevant chain between Mr Janes andMr Keys recorded the figure was reduced with perception in mind; Mr Janes said:"optically would like to come in at about 50% of the $150K". But concerns aboutperception are not irrelevant, providing the expense is itself reasonable andproportionate. As to that, it is clear the takeover offer placed very burdensomedemands on the directors well beyond those ordinarily required of them. Time wasalso tight.[87] I consider the directors' fees reasonable.44Legal fees[88] Abano does not have any in-house lawyers. It engaged Harmos Horton LuskLtd (Harmos Horton), its usual solicitors, to act for it in relation to the takeoverattempt. On 6 November 2016 Harmos Horton set out the services it anticipatedproviding Abano:We understand that the scope of our services will be to advise Abano on itsresponse to the takeover notice received from Healthcare Partners HoldingsLimited and any partial takeover offer that results, including advising onresponse approach and considerations, as well as Abano's legal obligationsunder the Takeovers Code, NZX Main Board Listing Rules, Companies Actand Financial Markets Conduct Act. These services are of a nature that in ourview fall within the scope of costs that are recoverable from HealthcarePartners under the permissible reimbursement provisions of the TakeoversCode.[89] Its fees came to $276,947.09.44 Healthcare Partners placed weight on an email from Mr Janes to Mr Keys (dated 16 November2016) which could be read as implying Mr Janes hoped to spread "confusion" through the media,a function antithetical to the duties of a director. Mr Keys said the correct construction was thatHealthcare Partners had done this, hence the reference. Mr Janes did not give evidence. I considerthe correct interpretation is that advanced by Healthcare Partners, for, this is what the emailappears to suggest. However, the point goes nowhere: there is no evidence any of Abano's publicobservations in relation to the takeover offer was misleading or deceptive. Healthcare Partnersdid not contend otherwise.[90] Harmos Horton provided a range of services:(a) Advising Abano about its obligations and those of its directors inrelation to the offer.(b) Drafting formal resolutions in relation to the offer.(c) Reviewing takeover documents, including to ensure they complied withthe Code, and were not misleading or deceptive.(d) Drafting, and assisting Abano to draft, documents required by the Code,including its company statement.(e) Advising Abano on the appointment of other advisors, including theindependent advisor required by the Code.(f) Attending Board meetings during the offer period.(g) Reviewing Abano's announcements and shareholder/investorcommunications during the offer period.(h) Reviewing Healthcare Partners' (offer) communications.(i) Corresponding with the Takeovers Panel, NZX and the FinancialMarkets Authority in relation to the takeover offer.(j) Corresponding with the lawyers for Healthcare Partners.[91] Healthcare Partners accepts Abano was entitled to seek and receive legaladvice in relation to the takeover. But, it contends Harmos Horton's fee is excessivebecause:(a) Abano has not waived privilege in relation to its legal advice.Assessment of Harmos Horton's fee is therefore problematical.(b) Some of the services provided by Harmos Horton do not appear to fallwithin those contemplated by Wilson J in Canterbury Frozen Meat; forexample, advising Abano its legal fees were recoverable under r 49.Healthcare Partners emphasises Abano bears the onus of proof.[92] Cases may arise in which maintenance of legal professional privilege by thetarget company poses an insuperable hurdle to proof related legal expenditure wasproperly incurred. This, however, is not one of them.[93] The types of work undertaken by Harmos Horton are consistent with what onewould anticipate in this context. Approached the other way, nothing stands out asunusual or out of place. The level of fee is consistent with market practice. Mr Hintonsaid the fees are: at market rates and the total fees are within the range I would typicallyexpect in a takeover transaction of this type. The nature of a takeover is suchthat it typically requires legal advice by senior lawyers (i.e. partners ordirectors) who, at least during the busiest period of the takeover, wouldcommunicate directly with the target company's Board and senior executivesat least daily. It is common for a law firm to have two or sometimes morepartners (or partner-equivalents) working on a takeover. The overall feestherefore tend to reflect this weighting of senior, rather than more junior,lawyers working on the transaction.[94] Harmos Horton provided a 20-page schedule of its time. The scheduleidentifies the lawyers involved, their time, a brief narration of the corresponding task,the date for each, and categorisation according to Canterbury Frozen Meat. On22 March 2017, Abano invited Healthcare Partners to raise "any specific concerns inrespect of any narrated item". Healthcare Partners raised none until trial, and thenonly somewhat elliptically. Mr Nathanael Starrenberg, a director of Harmos Hortoninvolved with the takeover, testified the schedule is accurate.[95] I consider the fees reasonable and recoverable for the same reasons, with oneaddition: Mr Starrenberg and Mr Hinton said the offer's partial nature meant it wasmore complex than a full takeover offer. Complexity heightens cost.[96] As to Canterbury Frozen Meat, the issue is not whether the fees would berecoverable under it, but whether they satisfy the principles outlined earlier; see[50]-[58]. And, no objection could attach in principle to recovery of a legal feedirected at explaining r 49(2) expenses are recoverable, unless unreasonable time wasexpended on that task. Harmos Horton's schedule reveals this issue was the subjectof advice on 13 and 15 December 2016, along with a host of other tasks: finalising theTarget Company Statement; calling the Board in relation to that statement; reviewingBoard Minutes of the meeting approving the Target Company Statement; reviewingthe final Forsyth Barr "mandate letter"; and "discussions with Abano management".All this took 7.8 hours. Mr Starrenberg said most of this time would have been spenton matters other than advice about the fact of recoverability.[97] Healthcare Partners contends Abano's challenge of the first and secondtakeover notices constitutes evidence of an "aggressive defence strategy". Thischaracterisation is available to this strand of events. The better view, however, is thatAbano was entitled to insist Healthcare Partners' notices were Code-complaint; itsobservations resulted in both being withdrawn and replaced with a third.[98] Healthcare Partners observes Abano engaged in something of a game, as itraised its objections successively rather than globally. This argument is a variant ofthe "resistance" submission, for, it reduces to the proposition otherwise recoverableexpenditure should be disallowed with reference to assessments of motive or purpose.Again, to accede to it would recreate a difficult distinction not contemplated by theCode, in an area better demarcated by its bright lines. The point can be illustrated withreference to a modest counterfactual. Had Abano's challenge to the takeover noticesbeen meritless, its associated legal expense would be unreasonable not because of"resistance" but the unmeritorious nature of its challenge.Remaining expenses[99] Remaining expenses can be dealt with briefly.[100] Mr Brendan O'Sullivan is an accountant who previously worked for Abano asits group financial controller. Abano engaged Mr O'Sullivan at an hourly rate of $90to obtain and organise information for the independent advisor. Mr O'Sullivan's feewas $21,420. Mr Tony Staub of Red Consulting Group Ltd was engaged to establisha "data room" to house information, in digital form, requested by the independentadvisor. He charged $105 per hour, at a total cost of $2,931.75.[101] Healthcare Partners contends both fees are unreasonable as a listed companysuch as Abano ought to have sufficient internal resources to cope, as well as financialrecords in a format that could be readily deployed to others.[102] Mr Hinton said the use of external resources is "a normal and sensible practicegiven that takeovers place very considerable and urgent demands on the managementof the target company", and it is "unusual for a target company to have ... sparemanagement resources" on hand. I accept this evidence.[103] Moreover, if each category of work had been performed by a large accountancyfirm, the cost would have been much higher. The balance of Healthcare Partners'submission reduces to a criticism of Abano's internal business organisation.[104] Abano engaged Merlin Consulting to identify Abano's shareholders who heldshares in custodial entities. Merlin Consulting's fee was $2,725. Healthcare Partnerscontends this expense was unnecessary. However, Abano was entitled to communicatewith its shareholders about the offer—the reason it engaged Merlin Consulting.[105] The final expenses concern a "roadshow". Abano organised an investorroadshow. It gave presentations between 26 January 2017 and 2 February 2017 inDunedin, Christchurch, Auckland, Wellington, Lower Hutt and Tauranga. Theroadshow focused on the complexities of a partial takeover offer and how this mightaffect Abano's shareholders. Associated expenses came to $5,977.14.[106] Healthcare Partners contends the cost was unnecessary, as "the same resultcould have been achieved with a phone call". That may be correct had the takeoveroffer been full rather than partial. And the implications of such an offer are not withoutcomplexity. Abano was entitled to convey this to its shareholders. It did so at onlymodest cost.[107] The remaining expenses are reasonable and recoverable.Orders[108] Abano's claim is established.45 Healthcare Partners is liable for:(a) $429,007.55.(b) Interest on this sum from the date Abano paid the expenses; and intereston the dividend amount from the date Abano paid the expenses to23 January 2017.46[109] Costs are reserved (Healthcare Partners having expressly asked to be heard oncosts). Submissions of not more than seven pages are to be filed and served:(a) From Abano by 5 pm Friday, 11 May 2018.(b) From Healthcare Partners by 5 pm Friday, 25 May 2018.[110] However, agreement on costs is encouraged.Addendum: objection to Mr Hinton's evidence[111] Healthcare Partners raised a (foreshadowed) trial objection to the admissibilityof Mr Hinton's evidence. I heard the evidence on the basis admissibility was betterdetermined after the fact.[112] Mr Hinton's brief of evidence was served, as a reply brief, on 23 March 2018.Healthcare Partners submitted the brief was not a reply one in terms of the timetable,and therefore inadmissible. However, Healthcare Partners filed an amended statementof defence on 12 March 2018, and only then did its objections in relation to theexpenses become clear. At trial, Healthcare Partners responsibly accepted it could45 For completeness, Healthcare Partners' counterclaim is dismissed.46 Healthcare Partners contends interest should be payable only from when it received each invoice.The relevant date is when Abano paid each; r 49(2) contemplates full reimbursement.have, but did not, retain its own expert in time for trial after receiving Mr Hinton'sbrief.[113] Objection was also taken under ss 7 and 25 of the Evidence Act 2006.Healthcare Partners argued the evidence was not relevant or substantially helpful asreasonableness of expenditure was governed by Canterbury Frozen Meat, andMr Hinton had not drawn a distinction between properly incurred expenditure andexpenditure in resisting a takeover bid. These objections were overtaken by myconclusion applicable principle required revisitation.[114] In any event, Mr Hinton's evidence was relevant and substantially helpful. Heidentified expenses typically sought in this context; their rationale; and whether thosein question were consistent or otherwise with market practice, including cost.Mr Hinton did not express an opinion as to reasonableness.[115] I thank counsel for the quality of their oral and written submissions...Downs J