Update on Exemptions - Conversion of equity securities acquired under a takeover offer

Published 1 November 2005

The Code requires that a full takeover offer include an offer for all classes of equity securities in the target company. In some cases a bidder who acquires convertible securities under a takeover offer may have to comply further with the Code to obtain the benefit of the rights attached to those securities. This situation arose during the full takeover offer for Urbus Properties Limited by ING Property Trust Management Limited.

Urbus had on issue ordinary shares and non-voting convertible notes. The convertible notes were equity securities for the purposes of the Code as they carried rights to acquire Urbus shares. Note holders could exercise the rights on certain dates or when certain events occurred, including a takeover offer.

Accordingly, ING Property’s offer for Urbus shares had to include an offer for the convertible notes. Note holders wishing to accept ING Property’s takeover offer could either accept the offer for their convertible notes or exercise the conversion right attached to the notes and then accept the offer in respect of the resulting shares. When note holders accepted the offer for convertible notes (rather than post-conversion shares) ING Property would become the holder of those convertible notes.

As note holders ING Property had the right to convert their notes on various maturity dates. However, if the offer resulted in ING Property having more than 50% but less than 90% of the voting rights in Urbus, ING Property would require shareholder approval to convert the notes into ordinary shares (under rule 7(d) of the Code) because this would increase its control percentage in a manner that did not comply with the Code.

ING Property was, therefore, in the position that it was obliged under the Code to include an offer for the convertible notes issued by Urbus in its full takeover offer; and yet the Code would not permit ING Property to convert any notes so acquired, without shareholder approval. In effect ING Property would be required to comply with the Code twice before obtaining the voting rights attached to the convertible notes.

The Panel granted an exemption to allow ING Property to convert any convertible notes it acquired under the offer without obtaining the approval of shareholders. The Panel noted that:

  • by exercising the conversion rights of the notes it acquired under the offer, ING Property would have the same level of voting rights in Urbus which it would have had if Urbus note holders had converted their notes into Urbus shares and then accepted the offer;
  • in full takeover offers the level of control percentage which the offeror obtains is determined by the level of acceptances under the offer and not by shareholder vote.

It is inherent in the Code that, as a bidder is required to include an offer for all classes of equity securities issued by a target company in a full takeover offer, it should be entitled to the benefit of the rights attached to those securities, including the future acquisition of voting rights, without further complying with the Code. In some situations exemptions may be needed to give offerors the full benefit of the rights attached to securities acquired under a takeover offer.