Panel Grants Rule 16(B) Class Exemption and Amends Buyback Class Exemption

Published 1 February 2011

Introduction

In May 2009, the Panel published a discussion paper and sought submissions on proposed changes to the class exemption for buybacks by Code companies of their own shares (“Clause 4 Class Exemption”) contained in clause 4 of the Takeovers Code (Class Exemptions) Notice (No 2) 2001 (“Class Exemptions Notice”). 

Later, in August 2009, the Panel published a discussion paper and sought submissions on a proposed class exemption from rules 7(d) and 16(b) of the Code (“Rule 16(b) Discussion Paper”). 

The issues that were discussed in the two discussion papers were similar because the Clause 4 Class Exemption closely mirrored the approval mechanisms in rules 7(c) and 7(d) of the Code. Accordingly, the review of the Clause 4 Class Exemption was put on hold until the Panel had also received submissions on the Rule 16(b) Discussion Paper. 

As a result of the Panel’s consideration of the submissions received on both discussion papers, the Panel has now, in the Takeovers Code (Class Exemptions – Buybacks and Rule 16(b)) Amendment Notice: 

(a) revoked the Clause 4 Class Exemption and replaced it with a new class exemption for buybacks (“Buybacks Class Exemption”); and

(b) granted a class exemption from rule 7(d) and rule 16(b) of the Code (“Rule 16(b) Class Exemption”). The Rule 16(b) Class Exemption has been inserted as the new clause 10A of the Class Exemptions Notice.

Below is a broad summary of the two class exemptions. The Class Exemptions Notice is published on the Panel’s website, www.takeovers.govt.nz. The discussion papers are also on the Panel’s website and they provide information on the policy behind the exemptions. 

Rule 16(b) Class Exemption 

Rule 16(b) of the Code requires that a notice of meeting containing a proposed resolution for an allotment of shares under rule 7(d) of the Code must contain or be accompanied by detailed disclosures. These disclosures include the exact numbers and percentages of the voting securities to be allotted and the percentage of the voting securities that are on issue that would be held or controlled by the allottees and their associates. 

If some or all of the exact numbers or percentages are unknown, in the absence of an exemption granted by the Panel, the allottee will not be able to comply with rule 7(d) of the Code for its increase in voting control, and the Code company will not be able to comply with rule 16(b) of the Code in respect of the notice of meeting. 

The Panel has granted a large number of exemptions from rules 7(d) and 16(b) of the Code for individual allottees and Code companies, which allow maxima to be stated in a notice of meeting instead of the exact numbers and percentages that are required by rule 16(b) of the Code. 

Those exemptions are consistent with the policy of the Code because if the non-associated shareholders approve the potential maximum allotment of voting rights, then, by implication, the shareholders also approve any lesser percentage of voting rights that may be acquired as a result of the transaction. 

The Panel has rarely declined to grant an exemption that has been sought from rule 16(b) of the Code.[1] On that basis, the Panel decided to grant a class exemption from rule 16(b) of the Code in relation to the types of transactions in respect of which exemptions from rule 16(b) are commonly granted to individuals. Those “specified transactions” are: 

(a) rights issues;

(b) underwriting arrangements (where the Takeovers Code (Professional Underwriters) Exemption Notice 2004 is not relied on); and

(c) the conversion of options and other convertible securities. 

The Panel recognises that it would be useful to extend the Rule 16(b) Class Exemption so that the flexibility it provides would apply to all transactions, not just the specified transactions. The Panel is working towards making rule 16(b) of the Code more flexible by seeking to have the Code amended. Accordingly, the Rule 16(b) Class Exemption is an interim measure. 

The Rule 16(b) Class Exemption is drafted to accommodate multiple allottees and multiple specified transactions (for example, it can be relied on for a rights issue that includes convertible securities, which is underwritten by a non-professional underwriter). 

The Rule 16(b) Class Exemption requires disclosures to be made in the notice of meeting of the maximum number and percentage of voting securities to be allotted to each allottee (known in the exemption as “person P”) who is relying on the exemption, and the maximum percentage of the total voting securities on issue that could be held or controlled by each allottee and its associates.[2] In addition, for specified transactions that occur for longer than 12 months, ongoing disclosures must be made in the Code company’s annual reports and on its website. 

The strict conditions included in individual rule 16(b) exemptions that have been granted by the Panel in the past, which prohibited any change of control of an allottee (if the allottee was a body corporate), or any increase above the potential maximum control percentage of the allottee, as disclosed in the notice of meeting, have been relaxed to some extent under the Rule 16(b) Class Exemption. This is explained further below. 

Change of control conditions 

Individual exemptions from rule 16(b) of the Code have usually been granted on a number of conditions, including the following ‘control change’ conditions: 

(a) that a proposed allottee does not become the holder or controller of an increased percentage of voting securities, other than as a result of the particular allotment, during the period specified in the exemption (which is generally until the expiry of any convertible securities or until the last allotment under the transaction); 

(b) that a proposed allottee does not increase its voting control at any time, during the period specified in the exemption, to a percentage above the maximum percentage of voting securities that was disclosed in the notice of meeting (“approved maximum percentage”); and 

(c) that there is no change of control of any corporate entity that has the benefit of the exemption, during the period specified in the exemption. 

The purpose of these control change conditions has been to constrain an exemption to its intended purpose. However they may be unduly restrictive. The Panel considers that any of these control change events should be able to occur, provided that shareholders of the Code company are fully informed of the effect of existing transactions before deciding whether to approve the further change of control. Accordingly, to provide flexibility, the control change conditions have been modified for the Rule 16(b) Class Exemption as follows: 

(a) an exempted person can increase its control by a means other than under the specified transaction (“other means increase”), and an exempted person that is a body corporate can have a change of control upstream (“upstream change of control”), and still enjoy the benefit of the Rule 16(b) Class Exemption, provided that: 

(i) the other means increase, or the upstream change in control, occurs by way of an acquisition under rule 7(c) of the Code or an allotment under rule 7(d) of the Code for which shareholder approval is obtained, or by way of another exemption granted by the Panel; and 

(ii) where the other means increase occurs by way of an acquisition or an allotment under rule 7(c) or 7(d) of the Code, full disclosure of the specified transaction under the Rule 16(b) Class Exemption must be made to the Code company’s shareholders in the notice of the meeting to be held to approve the other means increase or the upstream change of control; and 

(b) an exempted person can increase its control to a percentage above the approved maximum percentage, but only as a result of an other means increase undertaken in accordance with paragraph (a) above. 

Buybacks Class Exemption

 

A buyback is the acquisition by a company of its own shares. The Code is relevant to buybacks by Code companies because shareholders who are (together with their associates) near to or over the 20% threshold of rule 6 of the Code (the fundamental rule) may have their control percentage increased as a result of a buyback and could therefore potentially breach rule 6 of the Code. 

While acquisitions and allotments occur as the result of a conscious decision and positive action by the party increasing its voting control, buybacks can potentially result in inadvertent breaches of the fundamental rule because the increase in voting control is a result of non-action (i.e., non-participation in the buyback). Shareholders wishing to retain their resulting increase in control would, until recently, have relied on the Clause 4 Class Exemption. The Clause 4 Class Exemption has been revoked and replaced with the new Buybacks Class Exemption. 

The Buybacks Class Exemption allows the shareholders relying on it to increase their control percentage, with the approval (by an ordinary resolution) of the other shareholders of the company, who are not associates of the exempted person. The other shareholders make this decision on the basis of disclosures in the notice of meeting of the details of the potential maximum of the increase in the exempted person’s voting control that could occur as a result of that person not participating in the buyback. The Buybacks Class Exemption requires that an independent adviser’s report be provided for the shareholders, on the merits of the buyback and the resulting increase in the exempted person’s voting control in the Code company. 

The Buybacks Class Exemption has been drafted to be consistent, where relevant, with the Rule 16(b) Class Exemption. The Rule 16(b) Class Exemption accommodates long-term allotment periods. Similarly, the Buybacks Class Exemption does not inhibit buybacks from occurring over a long period of time. 

As with the Rule 16(b) Class Exemption, the conditions of exemption require ongoing disclosures about the control positions of exempted persons, in the Code company’s annual reports and on its website, where transactions occur over a period of more than 12 months. 

The Buybacks Class Exemption also includes the same conditions as the Rule 16(b) Class Exemption in relation to other means increases and changes of control above the approved maximum percentage. 

In addition, the Buybacks Class Exemption clarifies that shareholders’ approval of the buyback is for the purposes of the Buybacks Class Exemption only. It is not an approval under the Companies Act 1993 and if, for some reason, shareholders did not approve the buyback for the purpose of an exempted person’s increasing of its control percentage, the company could still do the buyback. 

The person who had wanted to increase its control percentage would then have to either participate in the buyback to ensure that its control percentage wasn’t increased, or sell down in accordance with clause 5 of the Class Exemptions Notice.[3] 

The new Buybacks Class Exemption also clarifies that there can be multiple resolutions to approve a buyback in accordance with the Buybacks Class Exemption. This means that a person (and any associates) is only restricted from voting on resolutions that relate to that person’s own increase in voting control. In the case of a non prorata buyback, the disposer of shares (and any associates) is prohibited from voting in favour of the resolutions. 

The Buybacks Class Exemption and the Rule 16(b) Class Exemption commenced on 29 November 2010. They appear complex, but the Panel executive is there to help if any clarification is required.

Footnotes:

[1] There have been some instances where the Panel has declined to grant exemptions from rule 16(b) of the Code. In those cases the details of the proposed transactions were so vague that the independent adviser would not have been able to report on the merits of the transaction. The Rule 16(b) Class Exemption could not be relied upon in such cases, as the conditions of exemption, for example, the requirement to disclose the full particulars of the transaction, the identity of the allottee or the reasons for the allotment in the notice of meeting, would not be met. 

[2] In most circumstances, the most readily comprehensible method for making these disclosures is in a table format.

[3] Clause 5 of the Class Exemptions Notice provides an exemption for buybacks that are not approved by shareholders under clause 4. It is a condition of the exemption that the exempted person whose control percentage increases as a result of a buyback eliminates the excess control percentage within 6 months and the additional voting rights are not exercised before that decrease.