Under the current provisions of the Code and the Companies Act, parties can in some circumstances choose to effect a merger or acquisition of a code company by utilising either code mechanisms or the reconstruction provisions of the Companies Act, or a combination of those mechanisms.

The Panel considers that it is appropriate different mechanisms are available for effecting mergers or restructuring code companies. Each mechanism has its own commercial advantages and disadvantages. In different situations alternative mechanisms will be more appropriate.

However, even though a transaction may achieve the same outcome, i.e. the merger or acquisition of a code company, shareholders of the relevant code company will have different rights and protections depending on whether the transaction is undertaken within the jurisdiction of the Code or structured as an amalgamation or scheme in a manner which avoids the Code.

The Code prevents any person from increasing its control percentage above 20% of voting rights except in a manner that complies with the Code. Any person wishing to obtain shares which would otherwise result in a breach of the Code must make a code offer or seek shareholder approval for an acquisition or allotment of a specified number of securities.

Important differences between the operation of the Code and schemes and amalgamations are:

(a)

The level of shareholder support required for a transaction to proceed

Under the Code an acquisition needs to be structured as a code offer with a minimum acceptance level of more than 50% or as an acquisition or allotment of a specified number of securities approved by disinterested shareholders.

Under the scheme and amalgamation provisions a transaction is approved by a special resolution of shareholders voting at a meeting. No shareholders are excluding from voting on such a resolution.

(b)

The information provided to shareholders in respect of a proposed transaction

In respect of a code offer or code transaction shareholders must be provided with specified information to enable them to decide the merits of a transaction for themselves. An important aspect of the documents provided is a report prepared for the shareholders by an independent adviser on the merits of the proposed transaction.

In respect of amalgamations and schemes the information required is not prepared for code company shareholders in particular. There is no requirement for an independent adviser's report.

(c)

The level of support required before shares in a code company can be compulsorily acquired

Under the Code compulsory acquisition rights apply when a person becomes the holder or controller of at least 90% of the voting rights in a code company.

In respect of a transaction structured as a scheme or an amalgamation shares in a code company can in effect be compulsorily acquired if a special resolution is passed.

Of particular concern to the Panel, and market participants who have contacted the Panel, is the level of shareholder support, particularly minority shareholder support, required in order for a transaction structured as a scheme or an amalgamation to proceed.

If a merger transaction is structured as a takeover offer the bidder cannot compulsorily acquire shares in a target company which is a code company from shareholders unless it becomes the holder or controller of shares representing at least 90% of the voting rights in that company. By comparison, if the transaction is structured as a scheme or an amalgamation with the same ultimate result as a takeover offer, shares in the code company would be able to be compulsorily acquired with a much lower level of shareholder support, 75% of shareholders who vote at a meeting.

The difference in the shareholder approval requirements for code transactions and for schemes or amalgamations is particularly significant in situations where there is a large shareholder in the code company who is able to pass a 75% resolution on its own if a number of minorities do not cast a vote. For example, if a shareholder holds 51% of the voting rights in the code company, that shareholder's vote is likely on its own to determine the outcome of the resolution.

If a change of control of a code company occurs by means of a scheme or amalgamation the change is likely to occur with a lower level of shareholder support than is required under the Code.

Concern about the lower level of shareholder support required for transactions structured as schemes or amalgamations was recently expressed in respect of the amalgamation of Waste Management and Transpacific (referred to earlier in this paper).

A number of market participants, including brokers and shareholders, have said that they could not understand why a transaction which looked like a takeover and had the same effect as a takeover could be carried out under the amalgamation or scheme provisions under the Companies Act. In respect of the Waste Management amalgamation some market participants had expressed the view that Waste Management shares were in effect being compulsorily acquired for cash consideration by Transpacific on the basis of a special resolution of Waste Management shareholders. They noted that Transpacific was not required to first become the holder or controller of 90% of the voting rights in Waste Management before compulsory acquisition applied. At the Waste Management meeting to consider the transaction the amalgamation proposal the special resolution was passed with a high majority but less than half of the voting rights in the company were exercised.

Some media commentators and market participants suggested that the Code is weak if it can be avoided easily by structuring a transaction as an amalgamation or a scheme which avoids the jurisdiction of the Code. They also suggested that in the future more parties wishing to acquire control of code companies would seek to utilise schemes or amalgamations and thus avoid the provisions of the Code.

The differences between information provided to shareholders in respect of a transaction is also important. In respect of a code transaction the shareholders of the code company will receive a document which contains information required by the Code on the merits of the transaction. An important part of such information is the report on the merits of the proposed transaction from an independent adviser approved by the Panel. These documents, in particular the independent adviser's report, are prepared from the perspective of shareholders of the code company. The provision of information required by the Code is intended to ensure that code company shareholders have sufficient information on which to make their own decision about the proposed transaction. The independent advisers' report is required to address more than fairness. It is intended to address the merits of the transaction, including the merits of not approving a transaction or accepting an offer.

In respect of a scheme or amalgamation outside of the Code, shareholders receive a document prepared for all of the merging entities and not tailored specifically to code company shareholders. It may contain an independent appraisal report if required by the listing rules. This is not the same as an independent adviser's report under the Code which is provided only for code company shareholders and which has the all encompassing requirement of a report on the merits of a transaction and not just a valuation.

The Panel is, like many market participants, concerned about the impact that the different shareholder rights and protections have on code company shareholders in respect of mergers and acquisitions.

The next part of this paper discusses why the Panel does not consider that the differences between the rights and protections available to shareholders in respect of different transactions which produce the same ultimate result are appropriate.