The Code was introduced to address concerns about changes of control which occurred as the result of stands in the market and overnight transactions from which the majority of shareholders could be excluded. The intention of the Code is to maintain the integrity of the market by providing special protections and rights to shareholders of code companies. The purpose of the Code is to ensure that all shareholders of code companies 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 sufficient to enable shareholders to make an informed decision.

However, there is a loophole resulting from the relationship between the Code and the provisions of the Companies Act relating to schemes and amalgamations which allows transactions involving the change of control of a code company to proceed in a manner not consistent with the intention of the Code.

Under the Companies Act it is possible to structure a transaction with the same ultimate result as a takeover under the Code, e.g. the acquisition of a code company, as a scheme or an amalgamation in a manner that 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 even though the transaction would result in a change in the control of a code company.

If a change of control of a code company occurs by means of a scheme of arrangement or amalgamation, the change will take place with a lower level of shareholder support than is required under the Code and without providing the type of information that shareholders would receive under the Code, such as an independent adviser's report. The transaction may also result in the compulsory acquisition of shares in the code company at a level significantly lower than the compulsory acquisition threshold contained in the Takeovers Code.

The amalgamation of Waste Management and Transpacific is an example of the use of an amalgamation as a device to avoid the Code. That transaction was in effect and seen by the market as, a takeover done by way of an amalgamation to avoid the constraints of the Code.

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 is concerned that this 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.

The Panel considers that some form of amendment to the Companies Act and the Code is necessary to ensure that the integrity of the takeovers market is maintained.

The primary focus for the protection of shareholders of code companies is the Code. Accordingly, the Panel considers that if schemes and amalgamations are to be permitted in respect of code companies then the intention should be to maintain the protections of the Code. The Panel considers that the use of schemes and arrangements involving code companies needs, as far as possible, to be consistent with the principles of the Code.

The Panel considers that this can best be achieved by amending the Code and the Companies Act 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 of arrangement and amalgamations.

The Panel as a regulator under the Code is in the best position to determine how the principles of the Code can be applied to schemes and amalgamations. Accordingly the Panel recommends that it be involved in schemes and amalgamations as follows:

• In respect of schemes, the Panel would make recommendations to the Court (which it would be required to take into account) as to the requirements to be met for the scheme of arrangement to be approved;
• In respect of amalgamations, parties to a proposed amalgamation would need to obtain the approval of the Panel to the amalgamation process.

The Panel would in respect of both scheme and amalgamations seek to ensure that the principles of the Code are consistently reflected in requirements to be met for a transaction involving a code company to proceed.

(a)

the Takeovers Code would 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;

(b)

Part XIII of the Companies Act, which deals with amalgamations, 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 Takeovers Code; and

(c)

Part XV of the Companies Act, which deals with schemes of arrangement, be amended to require that:

(i)

the Courts take into account the principles of the Takeovers Code when deciding the requirements for approval of a scheme of arrangement, including the level of shareholder approval required 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.