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New Minority Buy-Out Laws - December 2008

The Companies Act 1955 gives protection to minority shareholders.  They may require the company to purchase their shares in situations where the minority shareholder votes against a special resolution authorising a major transaction or significant changes to the company’s structure.  In September of this year, Parliament passed the Companies (Minority Buy-Out Rights) Amendment Act 2008 which improved the protection to those shareholders. 

 

The main changes are around:               

 

·                the calculation of the price for the dissenting shareholder’s shares;

·                 the ability to refer the determination of the share purchase price to arbitration if the shareholder objects to the price offered by the company for the shares;

·                 charging interest on the balance owing; and

·                 the timing of the transfer of shares.

 

Initially, the Bill proposed that the price would be an “honest estimate” of the value of the shares.  That was eventually rejected and the Act retained the existing “fair and reasonable” valuation method but provides that the valuation is to be determined as a pro rata share of the total value of the relevant class of shares.  That means that generally, no discount would be applied to reflect the minority holding.  That valuation will apply unless it would be “clearly unfair” to either the shareholder or the company. 

 

The company must pay the shareholder a provisional price for the shares based on the company’s valuation. If a shareholder objects to the price offered for the shares the company must submit to arbitration the determination of the price and the remedies available to the shareholder.   Except for exceptional circumstances, the arbitrator must award interest on any over or underpayment.

 

Initially, it was proposed that legal title to the shares would not pass until the price was ascertained and paid in full. Following submissions, drafting changes were made and the Act provides that legal title passes to the company on the day that the company agrees to purchase the shares.

 

For further information contact Tony Walker on tony@lawworksnz.com (303 9916) or Sarah Edmondson sarah@lawworksnz.com (303 9915).

 

Sarah Edmondson
November 2008

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