The Panel is concerned about the effect of the relationship between the Code and the reconstruction provisions of the Companies Act, reflected in the recent use of devices to avoid the jurisdiction of the Code. The Panel is concerned that the intention of the Code is not fulfilled if the protections contained within it can be avoided by market participants.

The Takeovers Act, and the Code promulgated under that Act, were introduced following a period of intense debate flowing from the change of control of listed companies by stands in the market or over night transactions from which shareholders (often a majority of shareholders) were excluded.

When the Takeovers Act was passed the legislature decided that in respect of a certain class of companies, code companies, there should be restrictions on the mechanisms for effecting changes of control.

The Code is intended to grant special rights to shareholders of code companies to ensure that all shareholders are treated equally, have an opportunity to participate in such changes of control and are provided with information sufficient to enable them to make an informed decision on any proposed change of control.

The Panel believes that the Code is intended to apply in respect of all code companies and provide protection to all code company shareholders in respect of transactions involving changes of control (above the 20% threshold of the fundamental rule). This intention is demonstrated by rule 5 of the Code which states that parties cannot contract out of the Code¹⁵ . It is also demonstrated by the fact that there were no statutory exceptions from the Code for changes of control resulting from schemes of arrangement or amalgamations.

The Panel considers that the policy and purpose of the Code is undermined if persons wishing to effect a change of control of a code company can avoid the disciplines of the Code entirely by choosing an alternative transaction structure not subject to those disciplines.

In the Panel's view it was not the intention of the drafters of the Code to leave the rights and protections which shareholders of code companies have in relation to a change of control to be determined by the form of the transaction structure utilised by parties wishing to change control of a code company. This can be seen from rule 6 of the Code which is based on the outcome of transactions irrespective of their nature. For example involuntary increases of control resulting from share cancellation or buy-back transactions are caught by the Code.

However, because of the current relationship between the Code and the Companies Act some market participants are utilising schemes and amalgamations in a manner which avoids the jurisdiction of the Code. In such circumstances the rights and protections provided by the Code would not be available to code company shareholders in respect of a transaction involving a change in the control of the code company. This is demonstrated by the Waste Management transaction described earlier in this paper.

The Panel considers that the use of amalgamations and schemes to avoid the Code is not consistent with the intention of the Code. It is the intention of the Takeovers Code to provide protections to all code company shareholders in respect of transactions involving changes of control. The Panel believes that at the time of the enactment of the Companies Act and the Takeovers Act it was not intended that the Companies Act should provide mechanisms to allow parties to avoid the shareholder protections provided by the Takeovers Code.

The Panel considers that some form of amendment to the Code and the Companies Act is appropriate to maintain the integrity of the takeovers market.

An amendment is necessary to ensure that the rights and protections available to code company shareholders in the event of a merger or acquisition are consistent and comparable irrespective of whether that merger or acquisition is structured as a code transaction or as a scheme or an amalgamation which avoids the jurisdiction of the Code.

The Panel considers that this can best be achieved by amending the Code and the Companies Act so that:

(a)

schemes and amalgamations are carved out of the Code completely; and instead

(b)

the principles of the Code are introduced into the provisions of the Companies Act dealing with schemes and amalgamations.

More specific details of the Panel's recommended amendments are set out later in this paper.

The Panel has reached this view after:

• Considering submissions made to the Panel in response to a paper on proposed changes to its policy on exemptions for schemes of arrangement;
• Considering ways to address issues arising from the relationship between the Code and the Companies Act;
• Issuing a discussion paper on schemes and amalgamation involving code companies and considering submissions made in response to that paper.

In the following section of this paper we discuss the Panel's paper on exemptions for schemes of arrangement and comments received in response to that paper on the use of schemes and amalgamations in respect of code companies. We also discuss the steps which the Panel took following receipt and consideration of those submissions.

The paper will then discuss the Panel's discussion paper on schemes and arrangements involving code companies, the submissions received in response to that paper and the Panel's response to those submissions.