In the discussion paper the Panel suggested that the direct costs and compliance costs resulting from the amendments discussed above may not be significant. Under the current provisions of the Companies Act parties make submissions to the Court and hold shareholder meetings. The introduction of Code principles into this process would not appear to significantly increase the cost of putting a scheme proposal to shareholders. The Panel suggested that the additional level of disclosure should not impose significant costs. It suggested that the only significant additional direct cost would be the cost of appointing an independent adviser, although we note that market practice does appear as a matter of course to embrace the appointment of an independent adviser for the preparation of an appraisal report.

Any increases in direct costs and/or compliance costs may be mitigated by the fact that as a result of the proposed amendments parties wishing to utilise the scheme provisions of the Companies Act, that are required to comply with the Code, would not need to apply to the Panel for exemptions from the Code.

NZX state that in respect of transactions of this nature compliance costs tend not to be a fundamental driving issue. The costs of the amendments to the Code and the Companies Act proposed by the Panel does not cause NZX concern.

Harmos Horton Lusk, who have advised a number of clients in respect of mergers and takeovers, state that in their experience compliance costs are not a material issue in transactions of this nature and scale.

Having reviewed the submissions received the Panel considers that the proposed amendments regarding schemes are appropriate and necessary to address the problems arising form the use of schemes in respect of code companies.

The Panel notes that parties which indicated a desire for consistency as to the rights and protections of shareholders in respect of any change of control of a code company, regardless of the mechanism utilised are generally supportive of the Panel's suggested amendments.

The Panel notes the submissions which state that there are sufficient protections in place for code company shareholders in respect of schemes in the because of the requirement for a special resolution of shareholders and the fiduciary obligations of directors. The Panel does not agree. A change of control of a code company can occur under a scheme with a lower level of shareholder support than is required under the Code without providing the type of information that shareholders would receive under the Code. As previously stated the Panel does not consider that this outcome is consistent with the Code.

The deficiency in the relationship between the scheme provisions of the Companies Act and the Code is demonstrated by transactions such as the merger of INL and Sky. It should also be noted that the Waste Management amalgamation transaction could have been structured as a scheme with the same outcome.

The Panel notes that the main concern which parties have expressed in respect of the proposals was the uncertainty of the term "principles of the Code" and as to the recommendations that the Panel would be likely to make to the Court in respect of proposed schemes.

The Panel considers that this concern can be addressed by clarifying its interpretation of the principles of the Code in the context of the proposed amendment and giving an indication of the likely recommendations that the Panel would make to the Court.

As indicated earlier in this paper, the intention of the Code is to ensure that all shareholders of a code company are able to participate in a change of control of a code company in accordance with rules which ensure equal treatment and the provision of information to enable shareholders to make an informed decision. Accordingly the recommendations of the Panel in respect of a proposed scheme will focus on:

(a)

The information provided to shareholders in respect of the proposed transaction;

(b)

The level of shareholder approval required for a transaction to proceed and who is entitled to vote on the relevant resolution; and

(c)

The level of control required before compulsory acquisition provisions apply.

In terms of the type of information that the Panel will recommend should be provided to code company shareholders, this will reflect what would have been provided to shareholders in respect of a code transaction, including a report prepared by an independent adviser on the merits of the transaction. We note that the Panel did not receive many comments about the need for consistency regarding information provided to code company shareholders. There seemed to be a general acceptance that it was appropriate for the same type of information to be provided.

Regarding the level of shareholder approval that the Panel would generally consider to be consistent with the principles of the Code, the Panel would not always seek to impose identical requirements to those contained in the Code. These may not be appropriate in every situation, particularly as schemes involve a meeting procedure and not an offer to each individual shareholder. The Panel would take into account the principles of the Code and the requirements of the Code which reflect those principles.

These principles are reflected in the three key requirements of the Code in relation to changes of control:

(a)

The 20% threshold in the fundamental rule - The 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 that complies with the Code. If any person already holds or controls more than 20%, then that person's control percentage cannot be further increased except as permitted by the Code;

(b)

The 50% minimum acceptance rule - which in effect requires that in order to proceed a takeover offer has to receive the support of the holders of the majority of voting rights in the company (including the voting rights held or controlled by the offeror); and

(c)

The 90% compulsory acquisition threshold - this threshold establishes a level which must be reached before a person can be compelled to sell their shares. It also establishes a level at which the majority shareholder should have the right to buy-out minorities and minorities should have the right to be bought out of a code company;

(d)

Voting entitlement - the provisions of the Code which govern meeting procedures for approval of allotments or purchases of shares recognises that those involved in a transaction, and who promote or formulate a transaction, and their associates, should be excluded from the vote on the proposed allotment or acquisition.