Australia: Combining Companies And Businesses In PNG – Schemes Of Arrangement

The economy of Papua New Guinea ("PNG") is booming and is likely to continue to do so for some time.

In this environment many companies and businesses are looking to combine and grow larger.

PNG law provides 3 main ways in which companies and businesses can combine – scheme of arrangement, amalgamation and takeover.

In this article I deal with schemes of arrangement under Part XVI of the PNG Companies Act ("Act") (Approval Of Arrangements, Amalgamations And Compromises By Court) as a means of combining companies under PNG law.

In future articles I will look at amalgamations under Part XIV of the Act and takeovers under the PNG Takeovers Code.

1. Economic Background

The PNG economy is enjoying unprecedented growth, largely as a result of the ExxonMobil operated PNG LNG Project ("Project").

It is anticipated that the economic impact of liquefied natural gas ("LNG") development will reach well beyond the direct investment in PNG that these projects necessitate. PNG is expected to enjoy the following the long term benefits from the Project:

• GDP will double to an average of PGK 18.2 billion per annum;
• Tax revenue will total around PGK67 billion over the 30 year life of the Project;
• Royalty payments to local landowners, local level governments, provincial governments and the State will total PGK5.3 billion; and
• 12,000 to 15,000 new jobs will be created during the construction phase of the Project and a further 1,250 jobs will be created after production commences. Of course, not all of these jobs will continue for the life of the Project.

These are enormous changes in a small economy and it remains to be seen how well the National Government handles the challenges that these economic changes will produce.

In the meantime local and international businesses are concentrating on strengthening their position in the local economy. These moves, as well as other business initiatives unrelated to LNG, have resulted in a marked increase in the number of businesses looking at how to combine and grow bigger in PNG.

2. Popularity Of Schemes

As noted above, there are 3 main ways of combining companies in PNG. Schemes of arrangement, however, have been the most popular means of doing so.

Examples of where a scheme of arrangement has been used in the past in PNG are:

• the merger of Niugini Mining Limited and Lihir Gold Limited in 1999/2000 (Niugini/Lihir Merger) where the National Court granted orders under Section 250(1) of the Act that all shares in Niugini Mining Limited be transferred to Lihir Gold Limited; and
• the merger of Orogen Minerals Limited and Oil Search Limited in 2002 (Orogen/Oil Search Merger) where the National Court granted orders under Section 250(1) of the Act that all shares in Orogen Minerals Limited be transferred to Oil Search Limited.

Currently Lihir Gold Limited and Newcrest Mining Limited are merging by way of scheme of arrangement under PNG law. It is rumoured that AGL Limited and Mosaic Oil Limited are also considering merging by way of scheme of arrangement in PNG.

3. How Schemes Of Arrangement Work In PNG

Section 250(1) of the Act provides that, notwithstanding the provisions of the Act or the company's constitution, a company may apply to the Court for an order that an arrangement be binding on the company and such other persons as the Court may order, including the company's shareholders.

Section 250 of the Act, like the equivalent provisions in the New Zealand Companies Act 1993 and Australian Corporations Act 2001, is very flexible and can be used to implement a wide range of corporate transactions. However, one of the most common uses for the provisions is to effect the acquisition by one company (Company A) of all of the shares in another company (Company B). In general terms, the way this works is as follows:

• Company A advises the Board of Directors of Company B that Company A wishes to acquire all of the shares in Company B and the purchase price which Company A is willing to pay to the holders of those shares for their shares. This price may be cash, or the issue of new shares in Company A, or a mixture of both.
• If the Board of Directors of Company B believes that the price proposed by Company A is sufficiently attractive, the Board of Company B agrees to recommend to Company B shareholders an "arrangement" under which all of the shares in Company B are transferred to Company A in return for shareholders in Company B receiving the purchase price. This "arrangement" is often called a "scheme of arrangement" or "scheme".
• However, Company A is only prepared to buy the shares if it can acquire all of the shares in Company B. A Court order under Section 250(1) of the Act has the effect of making the scheme of arrangement binding on all shareholders in Company B. However, given that the order has the effect of transferring Company B shareholders' shares without separate written agreement from those shareholders, the Court will usually only grant the order under Section 250(1) of the Act if:
  • the terms of the scheme have been approved by a resolution passed at a meeting of shareholders in Company B, on the basis of adequate information; and
  • the Court is satisfied that the terms of the scheme are fair and reasonable to the shareholders in Company B.
• Accordingly, the process for the Court making an order under Section 250(1) is as follows:
  • First, Company B applies to the Court for orders convening a meeting of shareholders to consider, and if thought fit, approve the scheme (the" First Court Hearing"). At the First Court Hearing, the Court reviews the information to be provided to shareholders to determine if it is adequate to inform them of the transaction.
  • Second, Company B holds a meeting of its shareholders ("scheme meeting") in accordance with those orders.
  • Third, if the shareholders approve the scheme at the scheme meeting, Company B comes back to the Court again (the" Second Court Hearing") for the final order under Section 250(1) that the scheme is binding on all shareholders. If the Court makes that order, the scheme becomes binding and is then implemented.
• Company A's agreement to pay the consideration upon implementation of the scheme is through a separate agreement entered into with Company B prior to the date of the initial application to the Court and through a Deed Poll entered into in favour of Company B shareholders.

This process is also well established in other jurisdictions including England, Australia and New Zealand. In New Zealand, the Companies Act 1993 (on which the Companies Act 1997 in PNG is closely based) has substantially the same provisions as are found in Part XVI of the PNG Act. In each of these other jurisdictions – England, Australia and New Zealand – schemes of arrangement have also been used to bring about the acquisition of one company by another.

4. Things To Look For

There are a number of things to be aware of with a scheme of arrangement under PNG law.

Part XVI of the Act does not prescribe the pass mark vote of shareholders which must be achieved before the scheme is approved by shareholders. The Act is silent on this important point. Instead, the Act leaves it up to the Court at the First Court Hearing to prescribe the pass mark vote. In both the Lihir Gold/ Niugini Mining scheme and the Orogen Minerals/Oil Search scheme, the Court set a pass mark of 75% of the votes cast at the scheme meeting. The Court did not require a minimum number of shareholders to vote in favour of the schemes. A similar result seems likely in the proposed Lihir Gold/Newcrest scheme. Technically, however, the Court could set any pass mark that it deems appropriate in the circumstances and this is usually the subject of detailed submissions by counsel for the applicant company at the First Court Hearing.

Importantly, section 251 of the Act provides that the Court may, for the purpose of giving effect to any scheme of arrangement approved under section 250, make a variety of orders to help facilitate the transaction. In particular, the Court may make orders relating to:

• The transfer or vesting of real or personal property, assets, rights, powers, interests, liabilities, contracts and arrangements; and
• The issue of shares, securities or policies of any kind; and
• The continuation of legal proceedings; and
• The liquidation of any company; and
• The provisions to be made for persons who voted against the arrangement or who appeared before the Court in opposition to the application to approve the arrangement; and
• Such other matters that are necessary or desirable to give effect to the scheme.

It is also important to note that even where the scheme meeting approves the scheme, the approval of the Court is also required. Technically, it would be possible for the Court to decline to approve the scheme after it has been approved by the scheme meeting. If Australian practice is any guide, however, a PNG Court would be very unlikely to withhold its approval once the scheme meeting has approved the scheme. One situation where the Court might withhold its approval would be if the scheme meeting was not conducted fairly and with regard to the interests of all shareholders.

Finally, the Court is not permitted to approve a scheme of arrangement under Part XVI of the Act unless the Court is satisfied that it is not reasonably practicable to effect the arrangement under Part XIV (Amalgamations) or Part XV (Compromises With Creditors) of the Act. This is usually the subject of detailed submissions by counsel at the First Court Hearing. (Act section 252).

5. Why Use Schemes Of Arrangement In PNG?

There are a number of reasons why schemes of arrangement have proved popular in PNG.

As noted above, schemes of arrangement have a proven track record of being used successfully in PNG to effect mergers and takeovers. Success breeds success and lawyers and merchant bankers now tend to look first at a scheme of arrangement when considering how to structure a company acquisition in PNG. This is not to say that the Takeovers Code has never been used for this purpose – it was used when New Britain Palm Oil Limited acquired Ramu Sugar Limited. The amalgamation procedure under Part XIV of the Act has also been used but generally for internal re-organisations or less complicated mergers involving PNG companies only.

Use of a scheme in a transaction involving a PNG company and a non PNG company, will generally give the PNG company greater control over the process than a takeover. Advisors need to be aware, however, that because 2 Court hearings are required in connection with a scheme this gives interested third parties an opportunity to make submissions to the Court as to why the merger should not proceed. In effect a scheme of arrangement provides a convenient forum for disaffected shareholders to object to the process. This is absent in a takeover under the PNG Takeovers Code because there is no requirement for Court approval of a takeover in PNG. Nor is there any takeover's panel or equivalent non judicial body in PNG to which dissatisfied parties involved in a PNG takeover may appeal.

It is also important to note that once the scheme is approved by shareholders, the scheme generally makes for a more certain outcome than does a takeover under the PNG Takeovers Code. As already noted, the First Court Hearing usually prescribes a 75% pass mark vote of shareholders to approve the scheme. Once this approval is obtained and the Second Court Hearing approves the scheme all shareholders are bound. In the case of takeover, however, a 90% acceptance is required before the acquirer may compulsorily acquire the balance of the shares in the target company.

The Court is empowered by the Act to make whatever orders are necessary to facilitate implementation of the scheme. This is particularly useful in complicated mergers. The PNG Courts have no such powers in relation to a takeover or an amalgamation under Part XIV of the Act.

Finally, effecting a merger by scheme of arrangement helps avoid some of the stigma associated with a company being "taken over". The use of a scheme generally implies agreement by the parties for the process to occur making the transaction more in the nature of an agreed merger of equals or near equals rather than a hostile takeover. It is possible, of course, for the target company to recommend acceptance of the acquirer's offer in a takeover situation too.

6. Conclusions

A scheme of arrangement under Part XVI of the Act is a proven method of combining 2 or more companies under PNG law.

Although other methods are available under PNG law, a scheme of arrangement offers the greatest flexibility and will usually be the most suitable way of effecting a complicated merger in PNG.

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