Practice Notes – variations of Code offers & variable pricing
Published 1 April 2003
Variations of Code offers
Rule 27 of the Code provides that an offeror may vary a takeover offer:
- to increase an existing component or components of the consideration;
- to add a cash component to the consideration;
- to include in the offer a cash alternative (if the directors of the target company have given their prior written approval).
The Panel has been asked to clarify whether an offeree who has accepted a particular alternative of a takeover offer, such as a cash or scrip alternative, can amend or revoke that acceptance in the event that the takeover offer is varied in accordance with the Code.
The Code does not require that acceptances be irrevocable but the terms of most takeover offers provide that all acceptances, once received by the offeror, are irrevocable. This provides certainty for offerors, particularly given that the offer may be conditional upon receiving a certain level of acceptances.
The Code provides (in rule 31(1)) that if a variation made to an offer increases the consideration being offered, the increased consideration must be provided to all those accepting the offer, regardless of when they accepted.
Where a scrip offer is varied by adding a cash alternative, the Code specifically requires the offeror to give all offerees, including those who have accepted the offer before the variation was made, the opportunity to take the cash alternative (rule 31(2)).
There is no equivalent requirement in the Code where there is a cash and scrip alternative and one or both are increased.
Accordingly, if an offer provides that acceptances are irrevocable and a scrip component of an offer is increased, those who have already accepted the scrip component will have the benefit of this increase, but no offeree who had already accepted a cash alternative would be able to switch his acceptance to the scrip alternative. Likewise, if an existing cash component is increased, any offeree who had already accepted the cash component would have the benefit of the increased consideration, but no offeree who had already accepted a scrip alternative would be able to switch his acceptance to the cash alternative.
This follows from rule 31 which will require amendment. There are two consequences:
- Firstly, the Panel considers that it is open to offerors, when making a takeover offer, to provide in the terms of the offer that acceptances are irrevocable unless there is a variation to the offer that increases the amount of one or more alternative types of consideration. In those circumstances the offeree can be given the ability to switch his acceptance and accept the alternative form of consideration. An offeror is not able to contract out of the Code. The suggested contractual term does not conflict with any rule of the Code.
- Secondly, rule 20 provides:
Same terms and consideration An offer must be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer.
In circumstances where there is a cash and scrip alternative and one or both are increased it is unlikely that rule 20 is being complied with if offerees are unable to switch their acceptances. Consequently, it would be advisable for offerors to enable offerees to switch their acceptances in these circumstances if rule 20 is to be complied with.
This Practice Note is provided for guidance only. While it signals the attitude of the Panel at this time, the Panel is not bound by this or any other guidance note.
The question has been raised with the Takeovers Panel as to whether rule 20 of the Takeovers Code, or any other provision in the Code, prohibits offers which provide for the consideration payable in the event of the acceptance level being reached to be increased if a pre-specified higher acceptance level is reached.
An example of an offer containing variable pricing would be one which offers $1.00 per share if an acceptance level of more than 50% is reached and $1.20 per share if the compulsory acquisition threshold of 90% is reached. To date no such offers containing variable pricing have been made in New Zealand under the Code.
The Panel considers that this kind of pricing variation in an offer does not breach the Code as all shareholders receive the same consideration. The offer would, of course, need to comply fully with rule 20 and all other provisions in the Code.
A variable pricing offer of this kind is different from a two-tier offer as the same final price is paid to all security holders. A two-tier offer may comprise an offer for a certain percentage of the target company at one price with a different price being offered for the remainder.
Rule 20 of the Code provides that a takeover offer must be made on the same terms and provide the same consideration for all securities belonging to the same class of equity securities under offer. Two-tier offers do not comply with rule 20 as they involve different consideration being offered to different shareholders.
The Panel will be monitoring the use of variable pricing particularly in regard to the requirements of rule 20.
This Practice Note is provided for guidance only. While it signals the attitude of the Panel at this time the Panel is not bound by this or any other guidance note.