By Michael Sullivan, Partner
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 Part 1 of this series published earlier this year, I dealt with schemes of arrangement under Part XVI of the PNG Companies Act ("Act") as a means of combining companies under PNG law.
In this article (Part II in the series) I will look at amalgamations under Part XIV of the Act.
In the final article (Part III in the series) (yet to be finalised) I will look at takeovers under the PNG Takeovers Code.
1. Economic Background
As described in detail in Part I of this series, 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.
In this environment 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. Amalgamation Process Has Enjoyed Limited Popularity
As noted above, there are 3 main ways of combining companies in PNG.
Schemes of arrangement are undoubtedly the most popular means of combining unrelated companies with different holding companies, however, advisors should also consider the amalgamation process under Part XIV of the Act when advising clients about combining companies and businesses in PNG.
Although it can be used for combining unrelated companies, the amalgamation process has generally been used when combining companies that form part of the same group of companies. The short form amalgamation process described in section 235 of the Act has been particularly popular.
Examples of where the amalgamation process has been used in PNG are:
- internal reorganisation of the Oil Search Limited Group of Companies in 2005 and 2006 following Oil Search's merger with Orogen Minerals Limited and its acquisition of Chevron Niugini Limited; and
- internal reorganisation of the Lihir Gold Limited Group of Companies in 2009 and 2010 as part of Lihir Gold's quest for a group structure attractive to both local and international investors.
3. How The Amalgamation Process Works In PNG
It is important to understand that amalgamations can be effected under both Part IV and Part XVI of the Act. However, section 252 does not allow a Court to approve an amalgamation under Part XVI of the Act unless the Court is satisfied that it is not reasonably practical to effect the amalgamation under Part XIV.
This article only deals with amalgamations under Part XIV. The reader should refer to Part 1 in this series of articles for information about how amalgamations are effected by scheme of arrangement under Part XVI of the Act.
In PNG two or more companies ("Amalgamating Companies") may amalgamate and continue as one company ("Amalgamated Company"), which may be one of the amalgamating companies or may be a new company.
Part XIV provides for both long form amalgamations and short form amalgamations.
(A) Long Form Amalgamations
Section 234 of the Act details the process by which an amalgamation proposal under Part XIV of the Act is approved.
The board of each Amalgamating Company must resolve ("Amalgamation Resolution") that:
- in its opinion the amalgamation is in the best interests of the company; and
- it is satisfied on reasonable grounds that the Amalgamated Company will, immediately after the amalgamation becomes effective, satisfy the prescribed solvency test.
The directors who vote in favour of an Amalgamation Resolution must forthwith sign a certificate stating that, in their opinion, conditions (a) and (b) are satisfied, and the grounds for that opinion. A director who fails to comply with this requirement commits an offence and is liable on conviction to the penalty set out in Section 413(1) of the Act.
The board of each Amalgamating Company must then send to each shareholder of the company, not less than one month before the amalgamation is proposed to take effect:
- a copy of a proposal detailing the terms of the proposed amalgamation ("Amalgamation Proposal"). An Amalgamation Proposal must include the details prescribed by section 233(1) of the Act; and
- copies of the certificates given by the directors of each board; and
- a summary of the principal provisions of the constitution of the Amalgamated Company (that is, the surviving company or the new company) where it has one; and
- a statement setting out the rights of shareholders under Section 91 (Shareholder May Require Company To Purchase Shares); and
- a statement of any material interests of the directors in the Amalgamation Proposal, whether in that capacity or otherwise; and
- such further information and explanation as may be necessary to enable a reasonable shareholder to understand the nature and implications for the company and its shareholders of the proposed amalgamation.
The board of each Amalgamating Company must, not less than one month before the amalgamation is proposed to take effect:
- send a copy of the Amalgamation Proposal to every secured creditor of the company; and
- give public notice of the proposed amalgamation, including a statement that:
- copies of the Amalgamation Proposal are available for inspection by any shareholder or creditor of an Amalgamating Company, or any person to whom an Amalgamating Company is under an obligation, at the registered offices of the Amalgamating Companies and at such other places as may be specified during normal business hours; and
- a shareholder or creditor of an Amalgamating Company, or any person to whom an Amalgamating Company is under an obligation, is entitled to be supplied free of charge with a copy of the Amalgamation Proposal upon request to an Amalgamating Company.
Before the Amalgamation Proposal becomes effective, it must be approved:
- by a special resolution of the shareholders of each Amalgamating Company; and
- where a provision in the Amalgamation Proposal would, if contained in an amendment to an Amalgamating Company's constitution or otherwise proposed in relation to that company, require the approval of an interest group, by a special resolution of that interest group.
(B) Short Form Amalgamations
There is a short form process for amalgamations ("Short Form Amalgamation") prescribed by section 235 where:
- a company and one or more other companies that is or that are directly or indirectly wholly owned by it wish to amalgamate and continue as one company (being the company first referred to) ("Scenario 1").
- two or more companies, each of which is directly or indirectly wholly owned by the same company, wish to amalgamate and continue as one company (being one of the amalgamating companies or a new company) ("Scenario 2").
A Short Form Amalgamation may only be used to combine companies belonging to the same group of companies.
In a Short Form Amalgamation, the Amalgamating Companies need not comply with section 233 (Amalgamation Proposal) or section 235 (Approval of Amalgamation Proposal) if:
- the Short Form Amalgamation is approved by a resolution of the board of each Amalgamating Company; and
- each resolution provides that:
- in the case of Scenario 1, the shares of each Amalgamating Company, other than the Amalgamated Company, will be cancelled without payment or other consideration; or
- in the case of Scenario 2, the shares of all but one of the Amalgamating Companies will be cancelled without payment or other consideration; and
- in the case of Scenario 1, the constitution (if any) of the Amalgamated Company will be the same as the constitution (if any) of the company first referred to; or
- in the case of Scenario 2, the constitution (if any) of the Amalgamated Company will be the same as the constitution (if any) of the Amalgamating Company whose shares are not cancelled.
- the board is satisfied on reasonable grounds that the Amalgamated Company will, immediately after the amalgamation becomes effective, satisfy the prescribed solvency test.
In a Short Form Amalgamation, the board of each Amalgamating Company must, not less than one month before the amalgamation is proposed to take effect, give written notice of the proposed amalgamation to every secured creditor of the company.
The resolutions approving a Short Form Amalgamation under section 235, taken together, are deemed to constitute an Amalgamation Proposal that has been approved.
The directors who vote in favour of a resolution for a Short Form Amalgamation, must forthwith sign a certificate stating that, in their opinion, the relevant conditions set are satisfied, and the grounds for that opinion. A director who fails to comply with this obligation commits an offence and is liable on conviction to the penalty set out in Section 413(1) of the Act.
(C) Registration Of Amalgamation Proposal
For the purpose of effecting an amalgamation copies of the following documents ("Registration Documents"), together with an application in the prescribed form must be submitted to the Registrar of Companies for registration:
- the approved Amalgamation Proposal;
- any certificates required under Section 234(2) or 235(5) of the Act;
- a certificate signed by the board of each Amalgamating Company stating that the amalgamation has been approved in accordance with this Act;
- the constitution (if any) of the Amalgamated Company;
- where the Amalgamated Company is a new company or the Amalgamation Proposal provides for a change of the name of the Amalgamated Company, the notice (if any) reserving the name of the company;
- a document in the prescribed form signed by each of the persons named in the Amalgamation Proposal as a director or secretary of the Amalgamated Company containing his or her consent to be a director or secretary and a certificate that he or she is not disqualified from being appointed or holding office as a director or secretary of a company
(D) Certificate Of Amalgamation.
After receipt of the Registration Documents, the Registrar must:
- where the Amalgamated Company is the same as one of the Amalgamating Companies, issue a certificate of amalgamation in the prescribed form; or
- where the Amalgamated Company is a new company:
- enter particulars of the company on the register of companies maintained by the PNG Companies Office ("Register"); and
- issue a certificate of amalgamation ("Certificate of Amalgamation") in the prescribed form together with a certificate of incorporation. (section 237)(1)).
Where an Amalgamation Proposal specifies a date on which the amalgamation is intended to become effective, and that date is the same as, or later than, the date on which the Registrar receives the Registration Documents, the Certificate of Amalgamation, and any certificate of incorporation will be expressed to have effect on the date specified in the Amalgamation Proposal. (section 237(2)).
(E) Powers of Court
In an amalgamation under Part XIV of the Act, the Courts have limited powers only to make orders. This contrasts with the broad order making powers conferred by Part XVI of the Act where a Court is dealing with a scheme of arrangement.
Where the Court is satisfied that giving effect to an Amalgamation Proposal under Part XIV would unfairly prejudice a shareholder or creditor of an Amalgamating Company or a person to whom an Amalgamating Company is under an obligation, the Court may on application by an interested party or the Registrar make any order which the Court thinks fit in relation to the Amalgamation Proposal. The orders which the Court may make include any one or more of the following:
- that effect will not be given to the Amalgamation Proposal;
- that the Amalgamation Proposal be modified in such manner as may be specified in the order;
- that the company or its board reconsider the Amalgamation Proposal or any part of it.
- These orders may be made) on such conditions as the Court thinks fit. (section 240).
4. Things To Look For
There are a number of things to be aware of with an amalgamation under Part XIV of the Act.
(A) Effective Date
On the date shown in the Certificate of Amalgamation:
- the amalgamation becomes effective;
- where it is the same as a name of one of the Amalgamating Companies, the Amalgamated Company has the name specified in the Amalgamation Proposal;
- the Registrar must remove the Amalgamating Companies, other than the Amalgamated Company, from the Register, and otherwise give effect to the amalgamation;
- the Amalgamated Company succeeds to all the property, rights, powers, and privileges of each of the Amalgamating Companies;
- the Amalgamated Company succeeds to all the liabilities and obligations of each of the Amalgamating Companies;
- proceedings pending by, or against, an Amalgamating Company may be continued by, or against, the Amalgamated Company;
- a conviction, ruling, order, or judgment in favour of, or against, an Amalgamating Company may be enforced by, or against, the Amalgamated Company; and
- any provisions of the Amalgamation Proposal that provide for the conversion of shares or rights of shareholders in the Amalgamating Companies have effect according to their tenor. (section 238)
(B) Statutory Registers
An amalgamation affects a variety of statutory registers.
Where an amalgamation becomes effective, no person charged with keeping any books or registers is obliged, solely by reason of the amalgamation becoming effective, to change the name of an Amalgamating Company to that of the Amalgamated Company in those books or registers or in any documents. (section 239(1)).
The presentation to any person of any instrument (whether or not comprising an instrument of transfer) by the Amalgamated Company:
- relating to any property held immediately before the amalgamation by an Amalgamating Company; and
- stating that the property has become the property of the Amalgamated Company by virtue of Part XIV,
is, in the absence of evidence to the contrary, sufficient evidence that the property has become the property of the Amalgamated Company. (section 239(2)).
Where any security issued by any person or any rights or interests in property of any person become, by virtue of Part XIV of the Act, the property of an Amalgamated Company, that person, on the presentation of a certificate signed on behalf of the board of the Amalgamated Company, stating that that security or any such rights or interests have, by virtue of Part XIV, become the property of the Amalgamated Company, must, notwithstanding any other law or the provisions of any instrument, register the Amalgamated Company as the holder of that security or as the person entitled to such rights or interests, as the case may be. (section 239(3)).
C. Minority Buy-Out Rights
Any shareholder of an Amalgamating Company who votes against the resolution to approve the amalgamation ("Dissenting Shareholder") will have minority buy-out rights under sections 91 to 96 of the Act.
A Dissenting Shareholder is able to exercise those rights within one month after the passing of the Amalgamation Resolution by notice to the relevant Amalgamating Company requiring the company to purchase the shareholder's shares. Within a further month after receiving such notice, the board of the relevant Amalgamating Company must do one of the following:
- agree to the purchase of the shares by the company;
- arrange for some other person to agree to purchase the shares;
- apply to the Court for an order exempting it from purchasing the shares - there are various grounds on which this application could be made; or
- arrange for the resolution to be rescinded or decide in the appropriate manner not to take the action concerned.
If the shares are to be purchased, the price payable must be "fair and reasonable". This price may be the subject of arbitration.
A possible means for an Amalgamating Company to limit the effect of the buy-out rights is for the special resolution approving the Amalgamation Proposal to be put on a conditional basis (that is, containing a condition which will render it ineffective if more than a certain number of votes are cast against the resolution). The disadvantage of this approach is that it alerts shareholders to the operation of the minority buy-out rights and, in effect, raises the hurdle for approval of the Amalgamation Proposal.
An alternative would be to include the condition in a restructure implementation agreement so that, if the resolution is passed but there is more than a certain number of votes against it, the amalgamation will not proceed. As the agreement will probably be made public before the shareholders' meeting, this may not be different in effect to a conditional resolution.
5. Why Use The Part XIV Amalgamation Process In PNG?
There are a number of advantages associated with using the amalgamation process in Part XIV of the Act, particularly in the context of a takeover.
As with a scheme of arrangement, the amalgamation process enables the target company to control the process particularly as regard obtaining shareholder approvals. This is the most important step in both an amalgamation under Part XIV and a scheme of arrangement under Part XVI.
Unlike a scheme of arrangement which involves two separate court hearings, no Court hearing is required with an amalgamation under Part XIV. The absence of the need to involve the Courts lends greater certainty to the outcome of the amalgamation process.
There is no statutory requirement for an independent expert's report in connection with an amalgamation under Part XIV. With a scheme of arrangement under Part XVI, however, the Court invariably requires such a report. It is possible of course that the board of an Amalgamating Company or even the meeting of shareholders itself may require such a report when considering an Amalgamation Proposal under Part XIV.
An amalgamation under Part XIV can generally be completed in a shorter period of time than a scheme of arrangement can be completed under Part XVI. This is because an amalgamation under Part XIV does not require the involvement of the Courts. On other hand, a scheme of arrangement normally takes a minimum of ninety to one hundred days to complete because 2 Court hearings are required.
There may also be a stamp duty advantage in proceeding by way of amalgamation under Part XIV. As the shares in the Amalgamating Company that disappears generally will be cancelled rather than transferred, there should be no share transfer duty payable in PNG. PNG's Internal Revenue Commission has, however, argued in some amalgamations that there is a transfer of the underlying assets of the Amalgamating Companies which is dutiable (in particular, land including mining leases). Although this could be challenged, it is a substantial risk. In the context of a takeover, a scheme of arrangement on the other hand will generally involve a transfer of shares in the target company from the target company shareholders to the acquiring company. This transfer will attract ad valorem share transfer duty (1%) in PNG as regards transfers of shares on the PNG register unless the transfers occur through a broker on the Port Moresby Stock Exchange ( this exemption may not be available if the shares on the PNG register cease to be quoted on the Port Moresby Stock Exchange).
There are a number of reasons why the amalgamation process is used much less frequently in takeovers and other complicated corporate re-organisations in PNG than schemes of arrangement. These include the following:
- the amalgamation process is very prescriptive and allows little or no flexibility in terms of procedure. Conversely, a scheme of arrangement is very flexible and the Court has wide powers to make facilitating orders.
- as there is generally no Court involvement in the amalgamation process, questions are sometimes asked about the independence and transparency of that process. This compares with the scheme of arrangement process where a minimum of two Court hearings is required.
- the amalgamation process is more complex and less easily understood by the Australian market and shareholders (although amalgamations will be familiar to US shareholders) than is the scheme of arrangement process. This is because the Corporations Act does not provide for an amalgamation process separate from schemes of arrangement. Schemes of arrangement are commonly used in Australia and therefore Australian shareholders are very familiar with them.
- the amalgamation process triggers minority buy-out rights for Dissenting Shareholders whereas shareholders who vote against a scheme of arrangement have no such rights.
The amalgamation process under Part XIV of the Act is ideal for internal corporate reorganisations and is commonly used for this purpose in PNG.
The amalgamation process is much less used for transactions involving companies with different ultimate holding companies and certainly is not favoured as a means of conducting takeovers in PNG.
Advisors should always consider the amalgamation process under Part XIV when advising clients on merger and acquisition structures in PNG.
The author can be contacted by e-mail (firstname.lastname@example.org) or telephone (675 3203333).
Winners of the 2010 Lawyers Weekly e.law Asia Pacific Box Breaker of the Year Award and the 2009 NSW Exporter of the Year Award
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.