Differential offers

Published 1 January 2005

Rule 20 of the Code requires an offer to be made on the same terms and provide the same consideration to all shareholders of the same class. Recently the Panel has received applications for exemptions from rule 20 from bidders wishing, with the consent of the major shareholder of a Code company, to offer less consideration to that shareholder than would be offered to remaining shareholders. These applicants have argued that smaller shareholders are not prejudiced by such an exemption and consequently it should be granted.

The most recent application in respect of a differential offer was made by Vector. After the Panel declined Vector’s initial application for an exemption to enable an upstream acquisition Vector decided to make a full takeover offer for NGC. Vector proposed to offer consideration comprising of a cash sum of $2.91 per share plus a preferential entitlement to an allocation of Vector shares in the event that Vector makes a public offering of its own shares. However, Vector had agreed with AGL that its New Zealand holding company would waive its rights to the preferential entitlement and such entitlement would not be offered to it under the takeover offer. Vector sought an exemption from rule 20 to allow the differential consideration to be offered, if the Panel considered that such an exemption was required.

In support of its application Vector argued that such an exemption would be consistent with the objective contained in section 20 of the Act of “assisting in ensuring that the holders of securities in a takeover are treated fairly”. Vector argued that because AGL was a large shareholder with a strong negotiating position that it should be allowed to agree to receive less consideration provided that this did not disadvantage other shareholders. Vector also argued that the proposed differential offer would result in remaining shareholders being treated fairly as they would be offered an additional element of consideration.

This is not a proper basis for the exercise of the Panel’s exemption power. Rule 20 is a fundamental requirement of the Code and is not to be relaxed by way of exemption as a result of an assessment of the desirability or otherwise of the commercial outcome for a particular group of shareholders. Such an exemption would not be consistent with the Code.