October 2000

AN INTRODUCTION TO THE TAKEOVERS CODE
JOHN KING - Chairman, Takeovers Panel


INTRODUCTION

The purpose of my address today is to give a brief overview of the Takeovers Code and the Takeovers Act. I am not here to re-debate the issues for and against Takeover legislation. The Code will become law on 1 July 2001 and the aim now is to understand the Code and the Panel's powers under the Takeovers Act. I will make particular reference to the provisions of the Act which to date have received little comment as the Code itself has been the centre of attention.

NATURE OF THE CODE

First, just a few comments on the overall nature of the Code.

It is not a mandatory offer regime as exists under the City Code in London. I still see articles and comment which state that if you acquire more than 20% of a code company then you must make a bid for the remaining shares in the company. This is not correct. It is an offence to acquire more than 20% of the votes in a code company except in a manner permitted by the Code. The New Zealand and Australian takeover codes are sometimes characterised as an enhanced participation regime, rather than a mandatory offer regime, designed to ensure that all shareholders participate in the takeover process. If a person wishes to acquire more than 20% of the voting securities then that can only be done in compliance with the Code which in broad principle means an offer to all shareholders or an acquisition with shareholder approval.

The Australian and New Zealand codes also include pause and publicity provisions which were the basis of the old Companies Amendment Act 1963 in New Zealand.

CODE COMPANY

The Code applies to companies that fall within the definition of a "code company". It applies only to companies and not for example to listed trusts. Companies are defined as companies registered in New Zealand. Those New Zealand registered companies that fall within the definition are those that are:

  1. a party to a listing agreement with the Stock Exchange; or
  2. were a party to a listing agreement during the previous 12 months; or
  3. have 50 or more shareholders and $20 million or more of assets.

The definition of a code company simply repeats the definition contained in the Takeovers Act. The Panel has no jurisdiction to amend that definition. A number of the submissions received from the public questioned how the $20 million threshold would be interpreted. The definition can be seen to be unhelpful but the Panel could only adopt the wording contained in the statute. Similar valuation thresholds have been included in other statutes and as a matter of practice the number of cases which fall within the grey areas tend to be relatively few. Any extension of the Code to other securities such as listed trusts would require a change to the statute.

KEY FEATURES

I will now give a broad overview of the Code focusing particularly on its key features.

Fundamental Rule

You will all be aware that the Code is based upon a fundamental rule which prevents any person from becoming the holder or controller of more than 20% of the voting rights in a code company except in a manner permitted by the Code. If any person already holds more than 20% then that holding cannot be further increased except as permitted by the Code. There are no restrictions below the 20% threshold.

In applying the fundamental rule it is important to consider closely various definitional aspects. For example the word "control" is defined as having "directly or indirectly effective control of the voting right". Hence the Code is built around "effective control" of the voting right and effective control may be held directly or indirectly.

In addition sub clause 2 of the fundamental rule expands the anti-avoidance process further. There are a range of deeming provisions dealing with situations where groups of people act jointly or in concert or join together as associates.

Some of these provisions at first glance appear somewhat complex. On the other hand corporate groupings with upstream and downstream structuring will be focused upon by advisers in an effort to see whether the obvious intent of the Code can be circumvented. The Panel has sought by the careful use of definitions and deeming provisions to ensure that the basic purpose and intent of the Code is not defeated by clever structuring.

The term "associate" and its definition is part of the anti-avoidance network. Some of the submissions made to the Panel sought a more detailed and prescriptive definition. The trouble with a black-letter law approach is that it is impossible to foresee and deal with all possibilities. Hence the use in the Code of language dealing more broadly with concept and principle which then requires a common sense interpretation against the background of the purpose and intent of the Code. There will always be some grey areas, but if you test the purpose and intent and the outcome of a transaction against the purpose and intent of the Code then, in most cases, it will be relatively clear cut as to whether or not the transaction is caught by the fundamental rule.

Some opponents of the Code, in an effort to advance their opposition, make statements as to the effect of the Code that are clearly wrong. For example, it has been suggested that if a group of institutions decide, after consultation, to vote against a proposal they may breach the fundamental rule. There is no breach. The fundamental rule is concerned with whether there is an increase in the voting rights which a person holds or controls. The Code will not inhibit the ability of the shareholders to exercise, as they think fit, the votes that they hold or control and will certainly not prevent discussion and consultation between shareholders.

The fundamental rule does catch and is intended to catch increases in voting power in a manner which can be regarded as involuntary. For example a major shareholder may limit its take up of shares in a cash offer to its pro rata entitlement but still increase the percentage of the voting rights that it controls if the remainder of the cash issue is not taken up in full. Buy backs and amalgamations can also have the same outcome. The Panel decided not to try to deal with these issues in the Code itself and intends to deal with these and other examples by way of class exemptions. There will be policy issues to be addressed with these exemptions. On the one hand there is the need to facilitate normal business transactions but on the other hand the purpose and intent of the Code must be preserved. These exemptions will need to be in place before the Code becomes operative on 1 July 2001.

Compliance Options

The exceptions to the fundamental rule are a range of compliance options. Apart from full and partial offers there are provisions permitting the acquisition or allotment of voting securities with the approval of an ordinary resolution of the code company. The process for obtaining shareholder approval requires an independent advisers report, a statement by the directors as to whether or not they support the proposal and voting restrictions to ensure that interested parties and their associates do not vote.

The compliance options also include a 5% creep for a person that already holds or controls more than 50% of the votes. Finally there are the compulsory purchase provisions which are triggered at the 90% threshold. The Code has no application below the 20% threshold. Below this threshold the Code contains no rules governing the buying or selling of shares. But you may not go beyond the threshold except in compliance with the Code.

Offers

I will now make some more specific comments about full and partial offers.

Full Offers

A full offer is an offer for all the voting securities in the target company and must extend to all other equity securities whether voting or non-voting.

Partial Offers

A partial offer is an offer to the holders of all voting securities for a specified percentage of the voting securities in the target company. There is no requirement for the offer to include other equity securities. Unlike Australia the Code allows the normal partial offer procedures whereby shareholders may sell all or part of their holding with scaling based on the specified percentage if there are excess acceptances.

The partial offer must be for more than 50% of the voting rights in the target company unless shareholders approve a lesser percentage. The approval process has been changed to form part of the offer procedure. The lesser percentage must be approved by shareholders who hold more voting rights in the target company than shareholders who object to the lesser percentage. For this purpose voting rights held by the bidder and its associates are disregarded.

Equal Treatment

Equal of treatment of shareholders is a key component of the Code. Consequently with full and partial offers the same terms, including price, must be offered to all security holders. Where there are different classes of shares the price must be fair and reasonable as between classes. An independent adviser must certify that the price is fair and reasonable as between classes.

Minimum Acceptance Condition

Where the bidder does not already hold or control more than 50% of the voting rights the Code requires that the offer must be conditional on the bidder receiving acceptances in respect of voting securities that will result in the bidder controlling more than 50% of the voting rights in the target company. The only qualification to this rule is in the case of a partial offer where the offer is for less than 50% and the requirement for shareholder approval of that lesser percentage has been fulfilled.

Price

There is no restriction on the price that may be offered apart from the requirement for the price to be fair and reasonable as between different classes of shares. This is in contrast to the position in Australia where the price must not be less than the highest price paid during the preceding four months. The Panel considered that the overall structure of the Code and in particular the inclusion of the minimum acceptance condition, in other words the need to bid for control, meant that the Panel could omit the pricing rule contained in the Australia code. Pricing rules can be very distortionary in their effect on the operation of the takeover market.

Contractual Document

It is to be emphasised that the offer is still a contractual document. The offeror is free to establish the terms and conditions of the offer in accordance with normal contractual principles but within the framework provided by the Code. There are rules in relation to offer periods, conditions, withdrawal or lapse of an offer, variation of the offer and the payment of consideration. Advisers will need to familiarise themselves with these rules so that they establish terms and conditions and procedures in the offer document which can operate in a normal contractual manner within these rules. The Code does not set out to provide a fixed formula to apply to all offers. It may be necessary to express the offer and its terms and conditions in a particular manner so as to obtain the full benefit of the flexibility which the Code permits.

For example, an offer may be subject to conditions, but they must not depend on the judgment of the offeror or any associate of the offeror and must not include a condition the fulfilment of which is in the power or under the control of the offeror or any associate. The reason for the restrictions is self evident. Conditions must not be a means of, in effect, turning the contract formed by acceptance of the offer into an option.

Offer Procedure

The Code sets out a procedure for takeover offers which is based on the existing procedures under the Companies Amendment Act 1993. These procedures include requirements for the offeror and the target company to disclose a range of information. Of particular importance is the requirement for the target company directors to obtain a report from an independent adviser on the merits of an offer. They must also make a recommendation as to whether the offer should be accepted or rejected or if they are unwilling to do so, then they must provide a statement to that effect and the reasons. The disclosure requirements are considerably wider than under the Companies Amendment Act and are to ensure that shareholders have the information necessary to make an informed decision as to whether to accept or reject the offer.

Dealings during the Offer Period

There are certain restrictions on the offeror during the course of a takeover offer.

The offeror is prevented from disposing of equity securities in the target company. The only qualification is that it may dispose of equity securities under another offer that is made under the Code. This is, of course, to cover the position where an auction effectively develops between competing bidders.

On the purchasing side the offeror can acquire shares where the offer is for cash or provides a cash alternative. The possibility of acquisitions being made must be included in the offeror's statement and also the number of securities that are purchased must not result in the offeror breaching the 20% threshold if the offer is in fact unsuccessful. If a bid is unsuccessful the offeror must not be in a position where acquisitions have increased its voting power beyond the 20% threshold.

Defensive Tactics

On the other hand the Code sets out to ensure that shareholders have the opportunity to decide on the merits of an offer and hence defensive tactics by the directors aimed at frustrating the offer or preventing the shareholders from having that opportunity are not permitted. The Code however makes it clear that this does not prevent directors from taking steps to encourage competing bona fide offers from other parties.

The exceptions to the prohibition of defensive tactics are three. Namely:

  1. The action has been approved by an ordinary resolution of the target company;
  2. The action is permitted under a contractual obligation or in the implementation of proposals approved by the directors of the target company, but the contractual obligation and the proposals must have been entered into or approved before a takeover notice was received or the target company became aware that an offer was imminent;
  3. If the action is taken or permitted for reasons unrelated to the offer with the prior approval of the Panel.

I will not comment further on process and procedure. The objective has been to provide commercial and sensible rules to ensure that takeovers take place in an orderly fashion so that all shareholders are treated equally and, on the basis of proper disclosure, are in a position to make an informed decision as to whether to accept or reject the offer.

Compulsory Purchase

To complete my overview of the Code I refer briefly now to the compulsory purchase provisions. These apply when he threshold of 90% of voting rights has been reached. It is a two way process whereby not only does the dominant owner (the holder of the 90%) have the right to buy but the remaining shareholders have a right to be brought out. The compulsory purchase provisions are triggered by reaching 90% of the voting rights but the actual obligations to buy or sell relate to all equity securities whether voting or non-voting.

Where the 90% threshold is reached as a result of a code offer then the price is the offer price under the offer. Otherwise the price is a cash price to be specified by the dominant owner which must be a sum that is certified as fair and reasonable by an independent adviser. If shareholders object to the price and the number of objections exceed the percentages referred to in the Code then the price is referred for expert determination to an independent person appointed by the Panel. To avoid issues of premiums or discounts for minority holdings the Code provides that the class as a whole is to be valued with each share then being valued on a pro rata basis.

THE TAKEOVERS ACT

Role of the Panel

I would now like to focus on the Panel's role now that it has completed its first task of formulating the Code. This moves our focus from the Code to the Takeovers Act. As I said at the outset the Act has not itself been the subject of much analysis or comment. As we look at the role of the Panel once the Code becomes law, it is very important that those who will be active in the takeovers market have a good understanding of the Panel's powers under the Act.

It has been decided by the Government that the Panel will not establish a separate organisation to support the Panel and to enable it to carry out its functions under the Act. Instead it is proposed that the Securities Commission will perform this function and at the present time legislation is being prepared to provide the appropriate powers to the Securities Commission and the Takeovers Panel to enable this to occur. This is a very sensible approach as the Commission already has the type of infrastructure which the Panel needs to carry out its functions subject only to the Commission expanding its resources to enable it to take on the additional workload.

Furthermore, the Securities Commission already has a monitoring and investigative role which would overlap with any separate organisation formed by the Takeovers Panel which will also have a monitoring and investigative role.

There will be, however, no delegation by the Takeovers Panel of any of its decision making powers to the Securities Commission. The Panel is a separate entity created by the Takeovers Act and all that the Securities Commission will do is provide the executive and the administrative resources required to support the Panel.

Under the Act the Panel has the functions specified in section 8 which include not only the formulation of the Code but also the requirement to keep under review practices relating to takeovers, to investigate any act, omission or practice for the purpose of exercising its powers and functions under the Act and also to make determinations and orders in accordance with the enforcement provisions contained in Part 3 of the Act.

Enforcement

The Panel has very extensive enforcement powers under the Takeovers Act. The legislature has clearly been concerned that those opposed to a particular takeover should not be able to use the Code and the litigation process to effectively derail a takeover and subvert the true purpose of the Takeovers Code.

Where the Panel suspects a breach or intended breach of the Code it can call a meeting for the purpose of determining whether to exercise its powers. Where a notice calling such a meeting has been given a restraining order may be made which may remain in force for a period expiring on the second day after the date for which the meeting is convened.

If the Panel determines that it is not satisfied that there is compliance with the Code, the Panel can extend the restraining order for a further 21 day period and can apply to the Court for a wide range of orders including orders for the disposal or forfeiture of shares, removal of voting rights, avoidance of agreements and payment of compensation.

The section names a number of interested parties who may also apply for orders from the Court where the Panel makes a determination that it is not satisfied that the Code has been complied with. These interested parties are:

  1. The Stock Exchange (if the Code Company is listed);
  2. The Code Company concerned;
  3. Members and affected former members of the Code Company;
  4. Other parties who have made offers under the Code in the six month period prior to the application;
  5. Any other person with the leave of the Court.

However these parties may only apply if:

  1. the Panel has consented to the application; or
  2. the person concerned has requested the Panel to make an application to the Court and the Panel has failed to do so.

These same interested parties may also make an application to the Court where a request has been made to the Panel to hold a meeting for the purpose of determining whether to exercise its powers and the Panel does not within 14 days hold a meeting, and, make a determination that it is either satisfied or not satisfied that the Code has been complied with. If such a meeting is held and the Panel determines that it is so satisfied then the interested parties have no right to apply to the Court.

It can be seen, therefore, that the Panel is in a very strong position with enforcement. It has its own powers and if it is not satisfied that a party is complying with the Code it has the power to take the matter to the Court or alternatively it may consent to other parties taking the matter to the Court. On the other hand the rights of the other parties to apply to the Court under the Act are very limited.

The Act also expressly provides that the Court may have regard to any determination made by the Panel, and in determining the type of order to be made, the Court may have regard to any recommendation made by the Panel including any recommendation that may be made at the request of the Court. These provisions further underline the importance of the Panel's role in enforcement.

Penalties

In addition to the various orders that the Court may make the Act also provides significant pecuniary penalties. A person who breaches the Code or is party to a breach of the Code may be ordered to pay a penalty not exceeding $500,000 in the case of a person not being a body corporate, or $5 million in the case of a body corporate.

The Court has power to excuse non-compliance of the Code in appropriate circumstances. In addition the Panel may exempt any person from compliance with any provision of the Code. Exemptions can be given on such terms and conditions as the Panel thinks fit and may be granted in respect of past as well as proposed acts or omissions.

That is all I wish to say on the Panel's role. Hopefully the commercial community will act in accordance with the spirit and intent of the Code. Through its executive, the Securities Commission, the Panel expects to interface with the market and assist the operation of the market by consultation and through the appropriate use of class and individual exemptions. No doubt from time to time these exemption powers can be supplemented by guidelines and information bulletins.

CONCLUSION

As I said at the outset my aim has been to give you an overview of the key aspects of the Code and also to encourage you to focus on the Takeovers Act itself and the various powers of the Panel under that Act. I restate that the aim of the Code and the Panel is not to inhibit or restrict takeovers but to encourage and facilitate takeover activity with all shareholders participating in the process of the passing of control on the basis of equal treatment and full disclosure. We now have a period of almost eight months for the Panel and the market to prepare themselves for operating under a Takeovers Code.