METLIFECARE LTD v ASIA PACIFIC VILLAGE GROUP LTD [2020] NZHC 1184

METLIFECARE LTD v ASIA PACIFIC VILLAGE GROUP LTD [2020] NZHC 1184 [2 June 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-629[2020] NZHC 1184BETWEEN METLIFECARE LIMITEDApplicantAND ASIA PACIFIC VILLAGE GROUPLIMITEDRespondentHearing: 28 May 2020Appearances: S M Hunter QC and M D Arthur for ApplicantA R Galbraith QC and M D O'Brien QC for RespondentJudgment: 2 June 2020JUDGMENT OF LANG J[on application for directions as to service and initial ordersunder Part 15 of the Companies Act 1993]This judgment was delivered by me on 2 June 2020 at 3.30 pm,pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors:Bell Gully, AucklandCounsel:A R Galbraith QC, AucklandM O'Brien QC, Auckland[1] The applicant, Metlifecare Limited (Metlifecare), is a publicly listed company.It has filed an application under Part 15 of the Companies Act 1993 (the Act) seekingapproval of a scheme of arrangement. The scheme involves the respondent, AsiaPacific Village Group Limited (Asia Pacific), acquiring all the shares in Metlifecarefor the sum of $7 per share.[2] Metlifecare now seeks directions as to service and initial orders under s 236(2)of the Act. Ordinarily this would be a straightforward matter that would be determinedon the papers and without the need for a hearing. The position is complicated in thepresent case by the fact that Asia Pacific has purported to terminate the schemeimplementation agreement (SIA) on which the scheme of arrangement is based.Background[3] Asia Pacific is a company incorporated in New Zealand for the purpose ofacquiring the shares in Metlifecare. It was incorporated after its owners hadundertaken a due diligence enquiry into Metlifecare's financial position. The partiesentered into the SIA on 29 December 2019 and no issues appear to have arisen untilNew Zealand encountered the COVID-19 pandemic in March 2020.[4] The SIA permitted Asia Pacific to terminate the agreement by notice in writingif a Material Adverse Change (as defined) or a Prescribed Occurrence (as defined)occurred before the arrangement was implemented. On 28 April 2020 Asia Pacificserved Metlifecare with a notice terminating the SIA. Asia Pacific relied on twogrounds to terminate the agreement. First, it alleged that the emergence and spread ofthe COVID-19 virus in New Zealand constituted a Material Adverse Change under theSIA because it had reduced, or was reasonably likely to reduce, Metlifecare'sconsolidated net tangible assets and underlying net profit. Secondly, it alleged severalacts by Metlifecare constituted Prescribed Occurrences under the SIA.[5] Metlifecare does not accept Asia Pacific has validly terminated the SIA. It hasaffirmed the SIA and is now attempting to follow the procedure for approval of thescheme as initially agreed by the parties. On 15 May 2020 Metlifecare also filed aproceeding in this Court seeking a declaration that the SIA remains in force and anorder requiring Asia Pacific and those standing behind it to perform the obligationsimposed on Asia Pacific under the SIA (the termination litigation). The validity of thetermination of the SIA by Asia Pacific will therefore be determined in the terminationlitigation.[6] Metlifecare accepts the scheme of arrangement cannot be implemented untilthe validity of the termination of the SIA has been finally determined. It contends,however, that this should not prevent it from holding a meeting of shareholders nowso that it can put the scheme to them and obtain their approval of it. At the same timeMetlifecare will seek the shareholders' approval to continue the termination litigation.[7] Asia Pacific contends the initial meeting is inappropriate and premature. Itargues that Metlifecare should not commence the procedure under Part 15 of the Actuntil the Court has determined the validity of the termination of the SIA. It thereforeopposes any orders or directions being made at this stage.[8] The dispute between the parties regarding the termination of the SIA means theTakeovers Panel has not issued a so-called "letter of intention" as it often does whenan application for initial orders is filed. Instead it has provided Metlifecare with aletter confirming the Panel's view that, if the Court considers it appropriate to grantthe application for initial orders at this point, the disclosure material Metlifecareproposes to provide to shareholders is of an adequate standard. The Takeovers Paneladds a rider to this. It says the sufficiency of the disclosure material will need to bereassessed once the termination litigation has been determined and prior to anyapplication for final orders.The arguments in greater detailMetlifecare[9] Mr Hunter for Metlifecare points out that initial orders have traditionally beenregarded as procedural in nature.1 Their primary purpose is to ensure that appropriateinformation about the proposed scheme of arrangement is provided to shareholdersbefore they vote on the merits of the scheme.2 Although the approval of initial orders1 Re Heartland Bank Ltd [2018] NZHC 2725 at [3].2 Re Trustpower Ltd [2016] NZHC 2499 at [2].does not reflect an indication that the Court considers the scheme to be worthy of finalsanction,3 Mr Hunter submits that the Court should only decline an application forinitial orders where it is beyond doubt that final orders are inappropriate.[10] Metlifecare acknowledges that the validity of the termination will impact onwhether final orders should be made if shareholders approve the scheme. It thereforeaccepts the scheme cannot be implemented until that issue has been determined.Mr Hunter submits, however, that the termination dispute is not the type of "knockoutblow" that should dissuade the Court from making initial orders. He saysMetlifecare's shareholders should be given the opportunity to decide at this pointwhether they wish to proceed with the scheme in light of Asia Pacific's purportedtermination of the SIA.[11] Metlifecare also says the material it proposes to send to shareholders willprovide them with appropriate disclosure regarding the events that have occurred andthe steps that will need to be taken before the scheme can be finally implemented.This is contained in the Notice of Meeting and a Scheme Booklet, both of which willbe sent to shareholders prior to the meeting. Mr Hunter points out that shareholdershave also had access to the announcements that both Metlifecare and Asia Pacific havealready made to the market regarding the issues that have arisen in relation to the SIA.[12] Mr Hunter also emphasises that, although Asia Pacific has been given inputinto the initial orders Metlifecare seeks, the issues to be determined at the meeting areappropriately matters for Metlifecare and its shareholders to consider. He says it isimportant for shareholders to be given the opportunity as soon as possible to decidewhether they wish to proceed with the scheme even though it will necessarily requirecomplex and costly litigation before it can be implemented. If that does not occurMetlifecare runs the risk of committing company resources to expensive litigation thatmay not have the support of its shareholders.3 Dominion Income Property Fund Ltd v Takeovers Panel (2006) 3 NZCCLR 946 (CA) at [22].Asia Pacific[13] On Asia Pacific's behalf Mr Galbraith points out that the present applicationappears to be unprecedented. Neither counsel has found any other case in which anapplicant has sought initial orders under Part 15 (or its overseas equivalent) incircumstances where one party to a scheme for which approval is sought has purportedto terminate it.[14] Asia Pacific also disputes Metlifecare's categorisation of the Court's role atthis stage of the process under Part 15. Mr Galbraith submits the authorities show theCourt has a broad discretion whether to make initial orders. He says the circumstancesof the present case are such that the Court should exercise its discretion against makingthe orders Metlifecare seeks until the termination litigation has been finallydetermined.[15] Mr Galbraith contends there is no utility in the Court making initial orders atthis stage because nothing definitive can occur unless and until the terminationlitigation has been finally determined in Metlifecare's favour. Mr Galbraith points outthat it is likely to be many months, if not years, before that occurs. It is thereforepointless to make orders that are likely to become stale, and superseded by time andevents, by the time the termination litigation has been resolved.[16] Asia Pacific is also concerned the market will interpret the making of initialorders as the Court giving its endorsement to both the scheme and the litigation.Mr Galbraith points out that the announcements Metlifecare has already made to themarket about the present proceeding and the termination litigation have resulted inMetlifecare's share price spiking in circumstances where there is no other obviousreason for that occurring.[17] Asia Pacific also challenges Metlifecare's assertion that it is important for itsshareholders to decide whether the termination litigation should proceed.Mr Galbraith points out that Metlifecare has already commenced the terminationlitigation without reference to its shareholders. He also points out that the material tobe provided to shareholders prior to the meeting says nothing about the likely costs,risks and chances of success for Metlifecare in continuing with it. Shareholderstherefore do not have an informed basis on which to make any decision regarding thecontinuation of the litigation.[18] Finally, Mr Galbraith points out that if Metlifecare wishes to obtain support forthe termination litigation from its shareholders it is not necessary for it to hold ameeting under Part 15 of the Act for that purpose. Metlifecare can put that issue to itsshareholders for their approval by a variety of alternative means.Decision[19] Section 236 of the Act relevantly provides:236 Approval of arrangements, amalgamations, and compromises(1) Notwithstanding the provisions of this Act or the constitution of acompany, the court may, on the application of a company or anyshareholder or creditor of a company, order that an arrangement oramalgamation or compromise shall be binding on the company andon such other persons or classes of persons as the court may specifyand any such order may be made on such terms and conditions as thecourt thinks fit.(2) Before making an order under subsection (1), the court may, on theapplication of the company or any shareholder or creditor or otherperson who appears to the court to be interested, or of its own motion,make any 1 or more of the following orders:(a) an order that notice of the application, together with suchinformation relating to it as the court thinks fit, be given in suchform and in such manner and to such persons or classes ofpersons as the court may specify:(b) an order directing the holding of a meeting or meetings ofshareholders or any class of shareholders or creditors or anyclass of creditors of a company to consider and, if thought fit,to approve, in such manner as the court may specify, theproposed arrangement or amalgamation or compromise and, forthat purpose, may determine the shareholders or creditors thatconstitute a class of shareholders or creditors of a company:(c) an order requiring that a report on the proposed arrangement oramalgamation or compromise be prepared for the court by aperson specified by the court and, if the court thinks fit, besupplied to the shareholders or any class of shareholders orcreditors or any class of creditors of a company or to any otherperson who appears to the court to be interested:(d) an order as to the payment of the costs incurred in thepreparation of any such report:(e) an order specifying the persons who shall be entitled to appearand be heard on the application to approve the arrangement oramalgamation or compromise.[20] These provisions contemplate an applicant seeking approval for a schemeunder Part 15 of the Act in two stages. First, the applicant seeks initial orders fromthe Court under s 236(2). At this stage the applicant sets out the procedure it proposesto follow in calling a meeting of shareholders to consider and, if appropriate, approvethe arrangement. If the required majority of shareholders at the meeting approve thearrangement the applicant applies for final orders under s 236(1) so the scheme can beimplemented.[21] I do not accept the Court has a narrow role at the initial stage of the process.Often it will not be necessary for a formal judgment to be issued on an application forinitial orders because many such applications are straightforward and uncontroversial.Importantly, however, s 236(2) does not require the Court to make a direction that ameeting of shareholders be convened to consider and, if appropriate, approve a schemeof arrangement. Rather, the court "may" take that step. This confirms thediscretionary nature of the power to make such a direction.[22] In practice, the circumstances in which the Court will decline to make initialorders under s 236(2) are likely to be rare. All parties to such transactions arenormally willing participants, and those advising them are well versed in therequirements that must be satisfied. The Court nevertheless has a supervisoryjurisdiction in relation to proposed transactions of this type and must ensure therequirements of the Act are met.[23] I consider that a fundamental requirement of the Part 15 regime is the existenceof an arrangement to which any orders made under s 236 can apply. This is notnormally an issue where the arrangement in question involves one party acquiring theshares in another. Such an arrangement is readily identifiable and the parties areinvariably committed to it. The problem here is that, although the arrangement isreadily identifiable, one of the parties has purported to withdraw from it.[24] In considering whether to make initial orders the Court cannot embark on anyconsideration of the strength of Metlifecare's claim in the termination litigation. Thatmust be left to be determined in the termination litigation. It follows that, as matterscurrently stand, one party contends the arrangement remains in existence and the otherparty denies that it is. The arrangement for which orders are sought may therefore stillbe in existence or it may not. I consider this uncertainty to be fatal to the presentapplication because the Court cannot be satisfied an arrangement remains in existenceto which orders under s 236(2) could apply.[25] Mr Hunter endeavoured to counter this argument by pointing out that theimplementation of the arrangement remains contingent on several matters other thanthe sanction of the Court. These include, for example, the need to obtain consent tothe transaction under the Overseas Investment Act 2005. He submits the fact that theimplementation of the SIA is similarly contingent on Metlifecare succeeding in thetermination litigation is therefore not fatal to the present application.[26] I do not accept this submission because I consider a comparison between theneed to obtain regulatory consents and the need to obtain a determination as to whetherthe SIA has been validly cancelled is inapt. The former proceeds on the basis that bothparties remain in agreement that they wish the arrangement to continue whilst the latterdoes not.[27] In case I am wrong on this point I will go on to consider whether I shouldnevertheless exercise my discretion in Metlifecare's favour. Several factors arerelevant to this.[28] The first and most obvious point relates again to the present uncertaintysurrounding the validity of the termination. That factor weighs heavily against makinginitial orders at this point.[29] Secondly, a question arises as to whether there is any utility in holding ashareholders meeting directed under s 236(2) in June or July 2020 when it will bemany months before the validity of the termination is finally determined. Thetermination litigation has been given a tentative trial date of 23 November 2020. Thatcannot be regarded as a firm date at this stage because Metlifecare has also named thetwo companies who stand behind Asia Pacific as defendants. They are based in Europeand have not yet been served with the proceeding. It is therefore not known whetherthose defendants will raise interlocutory issues that may protract the current pre-trialtimetable.[30] The trial will take at least three weeks because it will involve complexaccounting and economic evidence. It would therefore be overly optimistic for theparties to expect any judgment to be available before the end of January 2021. As aresult, and assuming for present purposes the judgment was in Metlifecare's favourand Asia Pacific did not appeal, Metlifecare will not be able to seek final orders beforeFebruary or March 2021 at the earliest. This would be at least eight or nine monthsfrom the date of the initial orders and the shareholders meeting. A delay of that lengthbetween a shareholders meeting and final orders is very unusual. An application forfinal orders is usually made very shortly after the shareholders have approved ascheme of arrangement.[31] On the other hand, I accept that Metlifecare's shareholders are likely to becontent to endure both delay and uncertainty if they consider there is a prospect ofAsia Pacific being held to the terms of the SIA. The only likely change ofcircumstances that might affect the shareholders' view of Asia Pacific's offer wouldbe a new bid from another party. If that should occur the SIA contains a mechanismby which Metlifecare can accept the new offer if Asia Pacific choose not to match it.To that extent the issue of delay is relatively neutral.[32] This still leaves the question, however, of why Metlifecare would want to holdthe shareholders meeting now when the final outcome of the termination litigation isso far away. The answer to that question is not because Metlifecare wishes todetermine whether its shareholders support the scheme of arrangement. It mustalready know shareholders are likely to support the scheme because it provides themwith a substantial premium over the price at which the company's shares are currentlytrading at. Rather, Metlifecare wishes to know whether its shareholders support thecontinuation of the termination litigation. That issue is likely to be the primary focusof any shareholders meeting held at this point.[33] This raises the issue of whether the Court has the power under s 236(2) to directa meeting where the principal topic likely to be discussed is the continuation of thetermination litigation. Section 236(2)(b) only permits the Court to direct a meetingof shareholders "to consider and, if thought fit, to approve, in such manner as the courtmay specify the proposed arrangement". I accept Mr Galbraith's submission that theissue of whether or not Metlifecare should continue with the termination litigation isnot a purpose for which the Court may direct a meeting to be held under s 236(2).[34] I also accept Mr Galbraith's submission that, if Metlifecare considers itimportant to gauge whether the shareholders support the continuation of thetermination litigation, it would be a relatively simple matter for it to obtain suchconfirmation through some means other than a meeting directed under s 236(2).Metlifecare has already announced to the market that institutional shareholdersholding more than 50 per cent of its shares support the litigation. It is thereforedifficult to see why it would feel the need to hold a meeting under Part 15 to ensure ithas the support of the remaining shareholders. That could be done at any generalmeeting of the company.[35] For these reasons, even if I was satisfied jurisdiction existed to make the initialorders Metlifecare seeks, I would have exercised my discretion against the making ofthose orders.Result[36] The application for initial orders is dismissed.[37] Much of the material Metlifecare has adduced in support of the presentapplication will still be relevant to any renewed application it may bring if thetermination litigation is determined in its favour. I therefore grant Metlifecare leaveto rely on that material in support of any renewed application for initial and final ordersit might bring.Costs[38] If the parties cannot reach agreement they may file concise memoranda in theusual way and I will determine costs on the papers.Lang J