As part of its function of keeping the law relating to takeovers of specified companies (code companies) under review the Takeovers Panel is recommending to the Minister of Commerce changes to the Takeovers Code and the Companies Act 1993 regarding amalgamations and schemes of arrangement involving code companies.

The Code provides special rights and protections to shareholders of code companies in respect of transactions resulting in a change of control of the voting rights in that company. These protections include shareholder approval thresholds that must be met, compulsory acquisition rights and the requirement that shareholders be provided with information to enable them to decide the merits of a proposed transaction.

However, recently some market participants have avoided these shareholder rights and protections by structuring a merger involving a code company as a scheme of arrangement or an amalgamation so as to avoid the Code. There has been significant media and market attention on the ability to use the reconstruction provisions of the Companies Act in this way.

The Panel, like many market participants, is concerned that the rights of shareholders of code companies, particularly minority shareholders, in respect of mergers and acquisitions have become dependent upon the choice of mechanism used by parties to effect such a transaction.

The Panel considers that there should be consistency as to the rights and protections for code company shareholders regardless of the procedure used to effect a merger with or acquisition of a code company. It is the intention of the Code to provide protections to all code company shareholders in respect of transactions involving changes of control.

The Panel also considers that it is important to preserve the rights of companies to choose which means of changing control they wish to use.

The Panel recommends to the Minister that fulfilling the intention of the Takeovers Act while preserving the rights of companies to use different reconstruction mechanisms can best be achieved by amending the Code and Companies Act so that:

• Schemes of arrangement and amalgamations are carved out of the Code completely; and instead
• The principles of the Code are introduced into the provisions of the Companies Act dealing with schemes of arrangement and amalgamations.

The Panel recommends to the Minister that:

(a)

the Code be amended to no longer apply to changes of control resulting from an amalgamation under Part XIII of the Companies Act or a scheme of arrangement under Part XV of the Companies Act; and

(b)

Part XIII of the Companies Act be amended to require that:

(i)

parties to a proposed amalgamation must obtain the approval of the Panel to the amalgamation process; and

(ii)

the Panel, in giving approval for an amalgamation process, shall take into account the principles of the Code; and

(c)

Part XV of the Companies Act be amended to require that:

(i)

the Courts take into account the principles of the Code when deciding the requirements for approval of a scheme of arrangement, including the level of shareholder approval and the information to be provided to shareholders; and

(ii)

before approving a scheme of arrangement the Court receives and takes into account recommendations from the Panel as to the requirements to be met for the scheme of arrangement to be approved.

The Panel has reached these recommendations after considering; media and market comments; its own experience; and submissions made to the Panel in response to two recent Panel discussion papers regarding schemes and amalgamations involving code companies.

The matters which the Panel considered in deciding to make these recommendations are set out in this paper.

In this paper we discuss:

• the current provisions of the Code, Part XIII of the Companies Act in respect of amalgamations and Part XV of the Companies Act in respect of schemes of arrangement;
• the relationship between the Code and reconstructions under the Companies Act and the effect of the ability to choose different mechanisms to acquire a code company;
• the Panel's concerns regarding the use of schemes and amalgamations involving code companies;
• consultation carried out by the Panel:
  • the Panel's paper on exemptions for schemes of arrangement,
  • the Panel's discussion paper on schemes and amalgamations involving code companies.