The Panel has considered the submissions made in response to its discussion paper on the relationship between the Code and the provisions of the Companies Act relating to schemes and amalgamations.

Prior to issuing the discussion paper the Panel had reached the view that the ability to use schemes and amalgamations to avoid the Code was inconsistent with the intention of the Code.

There is considerable support for the Panel's view that there should be a change of law to ensure that there is consistency as to the rights and protections code company shareholders have in respect of any change of control regardless of the mechanism utilised by the companies concerned.

There was also opposition to the need for a law change. However, the Panel notes that two of the four respondents which stated that there is no need for consistency of shareholder protections in respect of Code transactions, schemes and amalgamations acknowledged that the using a scheme or amalgamation may not be appropriate in all circumstances. There was an acknowledgement from those parties that in certain circumstances the use of a scheme or an amalgamation in a manner that avoids the Code could prejudice shareholders. We suggest that this prejudice occurs because the purpose and intent of the Code is not reflected in the provisions of the Companies Act in relation to schemes and amalgamations.

The Panel is not satisfied that the legislature intended that schemes and amalgamations should be able to be used as devices to avoid the Code and the protections it provides.

Some parties opposed to a law change note that it appears that schemes and amalgamations have only been used three times as a device to avoid the provisions of the Code. However, the Panel is concerned that the loophole exists and can be exploited. Now that the devices to avoid the Code have been well publicised their usage can be expected to increase, particularly if they appear to be sanctioned by the absence of a law change.

Taking into account the submissions made in response to the discussion paper on law changes, submissions on the questions raised in the earlier paper on exemptions for schemes, market comment and the Panel's own experience, the Panel is still firmly of the opinion that an amendment to the Companies Act and the Code is necessary to ensure the integrity of the takeovers market is maintained.

In some circumstances the use of an amalgamation or scheme of arrangement may be commercially justified.

After initial consideration of the issues arising from the relationship of the Code and the reconstruction provisions of the Companies Act, the Panel considered that it was important to:

• ensure consistency in respect of the rights and protections of code company shareholders in the context of mergers and acquisitions regardless of the mechanism utilised to effect such a transaction; and
• preserve the rights of companies to choose which means of changing control they use.

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.

The Panel's discussion paper set out this proposal and how it would apply in respect of schemes and amalgamations.

We set out separately in respect of schemes and amalgamations:

• The Panel's proposed amendments to the Code and the Companies Act; and
• Responses received in response to the Panel's suggested amendments.

The Panel's discussion paper suggested that to avoid problems resulting from the Code applying to some schemes and not others and to also address the difficulties resulting from trying to comply with the provisions of both the Code and the Companies Act, they could be amended as follows:

(a)

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

(b)

Part XV of the Companies Act could be amended to require that with schemes of arrangement affecting code companies:

(i)

the Courts take into account the principles of the Code when deciding what the appropriate process to be adopted for the approval of a scheme of arrangement, including the level of shareholder approval required and the information that needs to be provided to shareholders; and

(ii)

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.

Such an amendment to Part XV of the Companies Act would not require the Court to follow or implement the recommendation of the Panel. However, if the legislature were to approve such an amendment the Courts would have a clear direction as to the legislature's intention that protections for shareholders contained in the Code should be reflected in the Court's requirements for approval of the scheme.

The Panel's discussion paper proposed that the Court, and the Panel in making recommendations to the Court regarding a proposed scheme, should take into account the principles of the Code.

By considering the principles of the Code the Courts could ensure that the rights of shareholders of code companies are not detrimentally affected by the mechanism used to effect a change of control.

A provision for the Panel to provide recommendations would assist the Court in its consideration of the application of the principles of the Code.

Under the current provisions of Part XV of the Companies Act the Court is presented with submissions from only the parties to the proposed scheme of arrangement. There is a procedure for shareholders to be heard but this requires shareholders to take affirmative action. Some shareholders may not understand all of the issues involved in a scheme and the differences between a scheme and a code transaction. If the Court were required to take into account recommendations from the Panel, it would have a wider range of views to help it to make its decision regarding what requirements are needed to protect the rights of code company shareholders.

The suggested amendment would be similar to the current provisions of the Takeovers Act in respect of orders in the event that a person does not comply with the Code. Parties can apply to the Court for a number of orders which are within the discretion of the Court. Under section 38 of the Takeovers Act the Court may in determining any application for orders consider any determination made by the Panel under section 32 of the Act or any recommendation made by the Panel at a meeting under section 32 or at the request of the Court.

The approach suggested by the Panel would be consistent with the requirements regarding schemes of arrangement in other jurisdictions, particularly Australia and the United Kingdom. In both Australia and the United Kingdom, where schemes of arrangement are recognised as an important mechanism for effecting changes of control, it is a requirement that a scheme does not offend the takeovers regime.

The legal requirements regarding schemes in Australia are especially important to consider in the interests of harmonisation between takeovers code requirements in Australia and New Zealand.

Schemes of arrangement in Australia are governed by Chapter 5 of the Corporations Act. Takeovers are governed by Chapter 6 of the Corporations Act. Section 411(17), Chapter 5, of the Corporations Act provides that a Court cannot approve a scheme of arrangement unless:

(a)

The Court is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Corporations Act (i.e. the takeover provisions); or

(b)

The Australian Securities and Investment Commission provides a "no objection" statement.

We understand that the Australian Securities and Investment Commission's current practice is to issue no-objection statements if it is satisfied that the Eggleston Principles are being broadly met by the scheme of arrangement.

The Eggleston Principles are the objectives of Chapter 6 of the Corporations Act. These principles are set out in section 602 which states that the purpose of chapter 6 (the provisions regulating takeovers) is to ensure:

(a)

the acquisition of control over a relevant entity takes place in an efficient, competitive and informed market;

(b)

the holders of the shares or interests, and the directors of the company or body or the responsible entity for the scheme:

(i)

know the identity of any person who proposes to acquire a substantial interest in the company, body or scheme,

(ii)

have a reasonable time to consider the proposal, and

(iii)

are given enough information to enable them to assess the merits of the proposal; and

(c)

as far as practicable, the holders of the relevant class of voting shares or interests all have a reasonable and equal opportunity to participate in any benefits accruing to the holders through any proposal under which a person would acquire a substantial interest in the company, body or scheme; and

(d)

an appropriate procedure is followed as a preliminary to compulsory acquisition.

The Panel's discussion paper asked market participants for their view regarding the suggested amendments to the Code and Companies Act. Respondents were asked to address the following questions in particular:

• What are your views on the Panel's proposal that the Code and the Companies Act could be amended so that:
  • schemes 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 and amalgamations?
• Should the Court be required to take into account the principles of the Code in approving schemes of arrangement?
• In respect of schemes of arrangement, what are your views on an amendment which would provide that:
  • the Code no longer applied to changes of control resulting from a scheme of arrangement under Part XV of the Companies Act;
  • in deciding what the appropriate process adopted in respect of a scheme of arrangement should be Courts have to take into account the principles of the Code; and
  • before approving a scheme of arrangement the Court would have to receive and take into account recommendations from the Panel as to the requirements to be met for the scheme of arrangement to be approved?
• Would such amendments address concerns that some market participants have regarding the use of schemes of arrangement in respect of code companies? Are there other alternatives which market participants would like to suggest?
• are your views on the possible compliance costs of such amendments to the Code and Part XV of the Companies Act?