ANNUAL REPORT 2004

CHAIRMAN'S REVIEW

John King

The Takeovers Code has been in force for nearly three years. It is no longer new. Market participants are now used to the Code and have seen it operating in various circumstances. For shareholders the value of the Code is that it ensures a process by which they are well informed and able to decide whether or not to accept a takeover offer. This is a far cry from the days of midnight raids that caught many shareholders unawares.

Recent months have seen a high level of takeover activity with successful full and partial takeovers taking place in an orderly fashion under the Code. These highlight the value of the framework of the Code for those operating in the takeovers market.

THE PANEL AS AN ARBITRATOR

A key attribute of the Panel is that it must exercise its powers within tight time frames so as to ensure that issues are disposed of promptly and takeover activity can proceed and not be held up by lengthy bureaucratic processes. In this sense it has an arbitration role.

One instance of this was during Rubicon Limited’s successful partial offer for Tenon Limited. The conditions of Rubicon’s offer sought to impose obligations on Tenon’s directors to provide confirmation about aspects of its affairs to Rubicon, or to an expert appointed by Rubicon. Tenon’s directors, in a public release, declined to provide the confirmations sought. Rubicon alleged that the decision by Tenon’s directors not to assist Rubicon by satisfying these conditions amounted to an action designed to frustrate its offer. Rubicon claimed that this contravened rule 38 of the Code. The Panel determined that the Code’s prohibition of defensive tactics does not oblige the directors of target companies to provide information required by an offeror. The board of the target company should not be manoeuvred, by conditions included by an offeror in its offer, into a position where it can be suggested it is in breach of the rule 38 prohibition on defensive tactics merely by refusing to provide information or give access to information. The matter was heard and decided by the Panel under section 32 of the Takeovers Act within a week so that the takeover could proceed with minimal disruption and delay.

Another issue that the Panel was able to resolve quickly also arose during the Rubicon partial takeover of Tenon. Tenon alleged that Rubicon’s announcement that it would pay handling fees to brokers in connection with acceptances of Rubicon’s partial offer was a breach of the Code. The complaint raised an enforcement matter which could have gone through the process of a section 32 meeting. However, the Panel over the space of two days received submissions from the parties and then issued a statement that it considered that the complaint was without merit. No meeting under section 32 was sought so that the Panel’s action led to a quick resolution of the matter.

THE PANEL AS A FACILITATOR

As the market has become used to the Code and the Panel’s role in the marketplace, the concept of the Panel as a facilitator rather than as an aggressive policeman is evolving. The Panel’s executive is crucial for this to occur. Although the Panel does not approve takeover documents, the executive can, and does, pick up and point out non-compliance issues in time for them to be corrected. This assists the efficient operation of the takeovers market under the Code.

The value of the Panel as a facilitator was also evident during a compulsory acquisition by SK Foods International following its successful takeover offer for Cedenco Foods. After SK Foods became the dominant owner of Cedenco it was required to issue an acquisition notice to outstanding shareholders. An issue arose for the Panel because SK Foods was not entitled to assert, as it had, that outstanding Cedenco shareholders had no right to object to the compulsory acquisition price. The Panel used its power to grant a retrospective exemption which allowed SK Foods’ flawed compulsory acquisition to proceed as planned but provided for the price to go to expert determination if sufficient shareholders objected. In the event less than 10% of the outstanding shareholders objected to the price and the expert determination process was not triggered. Again the matter was settled quickly. The Panel’s ability to grant a retrospective exemption is of great value enabling problems to be dealt with efficiently but also in compliance with the policies of the Code.

The Panel’s facilitation role was also demonstrated in two recent Code offers where shareholders resided in numerous overseas jurisdictions. Individual exemptions to allow cash, rather than securities, to be offered to overseas shareholders were granted to Independent Newspapers Limited for its offer for Sky Network Television Limited and to Rural Portfolio Investments Limited in relation to its partial offer for Wrightson Limited. In both cases the bidders intended to offer scrip in jurisdictions in which New Zealand disclosure documents could not be used. The policy of rule 20 of the Code is to ensure that there is equal treatment of all security holders of a code company. The Panel is reluctant to grant exemptions which would allow offers to be made to certain shareholders on different terms. However, it is important that the making of scrip offers be a real and practical option available to bidders. In addition, a proper relationship needs to be maintained between the cost of compliance with the Code and the benefits resulting from it. Exemptions from rule 20 were granted to INL and RPI because the number of shares held by shareholders in overseas jurisdictions was so low that compliance with the securities laws in those jurisdictions would have been impractical and unreasonably expensive. Also, the Panel was satisfied that the alternative consideration offered to overseas shareholders was appropriate and put the overseas shareholders in the same position as shareholders who receive and immediately sell the scrip offered by the bidder. The difficulties faced by INL and RPI may well arise with future scrip takeover offers as most code companies will have shareholders resident overseas. The Panel published in Code Word the circumstances in which it would be likely to consider granting specific exemptions from rule 20, however, each case will be treated on its merits.

Class exemptions are also utilised to facilitate the operation of the takeovers market. However they are considered carefully to ensure that they operate within the policy upon which they are based. The class exemption for professional underwriters was amended recently. There was a risk that the exemption could be used by corporate investors as a means of increasing control in code companies. The Panel did not intend the class exemption to be used in this manner. The class exemption was amended to clarify that it does not apply if an underwriter has a collateral intention of increasing its voting control in a code company. A number of conditions on the applicability of the exemption apply, including the provision that it will not apply where the underwriter already holds more than 5% of the voting rights of the code company. In appropriate circumstances individual exemptions can be sought where the class exemption does not apply.

An exemption was also an effective solution to a conflict of interest that arose when the chief executive officer of Trans Tasman Properties Limited was required by the Code to sign the certificate to be included in the Trans Tasman Properties target company statement issued in response to the takeover offer from SEA Holdings New Zealand Limited. The chief executive officer of Trans Tasman Properties was also the chief executive officer of SEA Holdings. The Panel agreed it was inappropriate for him to certify the target company statement and granted an exemption. As a condition of the exemption, he was required to certify that he had provided to the board of Trans Tasman Properties all information necessary to enable the directors to sign the required certificate. The exemption was an effective solution to the conflict of interest inherent in the one person holding the role of chief executive officer of both the offeror and also of the target company, while being consistent with the objectives of the Code.

THE PANEL AS AN ENFORCER

The Panel watches the market very carefully and will not hesitate to act when it believes that its intervention is needed. The participants in the market are aware of this. Mostly we believe that market participants are trying to comply with the Code. Where this doesn’t occur it is usually a genuine mistake or a misunderstanding of how the Code works.

The Panel took prompt action after Restaurant Brands Limited received a takeover notice from King Win Laurel International Limited, which did not comply with the Code in a number of respects. The Panel’s objective was to have the notice withdrawn from the market as quickly as possible, and preferably without expensive regulatory action. The Panel immediately contacted King Win asking it to withdraw its notice and explaining why the takeover notice did not comply with the Code. King Win was told that the Panel would act to restrain the offer if necessary and subsequently withdrew its takeover notice. Some media commentators have said that the King Win takeover notice should not have been notified to the market because it was so obviously non-complying with the Code. The Panel does not accept this. While the shortterm increase in Restaurant Brands’ share price may have been unfortunate, the Panel considers it is not for target companies to withhold from shareholders the information that a takeover notice has been received that purports to comply with the rules of the Code.

In the Dominion Retail Property Fund Limited takeover bid for Tri-City Properties Limited the Panel for the first time had to consider the consequences of an error in a takeover document which affected the price being offered by the bidder. The Panel determined, by a section 32 meeting, that Dominion Retail had breached the Code by not correctly stating all the terms and conditions of the offer. In considering how this could be remedied, the Panel had to determine whether the mistake could be corrected or whether the offer would need to be withdrawn and a new offer made. The Panel did not consider that the latter alternative was in the interests of shareholders if it could be avoided. The practical solution would be for the terms of the offer to be clarified and for all security holders who had accepted the misleading offer to be given the right to withdraw their acceptances. This would put shareholders in the same position they would have been in had the original offer correctly stated the price in the first place. In addition, for this to occur, it would be necessary for the offer period to be extended. The Panel accepted an undertaking from Dominion Retail that the company would explain the correct terms of the offer to security holders, grant them the right to revoke their acceptances and extend the offer period. We understand that a small number of security holders withdrew their acceptances.

COMPULSORY ACQUISITION

In March 2004 the Panel for the first time appointed an independent expert to determine the consideration for shares to be acquired compulsorily. This was the final step in the takeover bid by Ngai Tahu Holdings Corporation Limited for Shotover Jet Limited. The issue arose when Ngai Tahu received objections to the consideration specified in its compulsory acquisition notice from shareholders who together held more than 10% of the outstanding voting rights. The role of an independent expert is to determine the fair and reasonable value of an equity security. This becomes the amount that the dominant owner must pay to outstanding security holders. It may be higher than, equal to, or lower than, the acquisition price specified by the dominant owner in the acquisition notice. The value ultimately determined by the independent expert was higher than the consideration specified in Ngai Tahu’s compulsory acquisition notice. Accordingly, all outstanding shareholders were to be given a “top-up” of the difference between the amount specified in the compulsory acquisition notice and the value of each Shotover Jet share determined by the expert.

MAKING THE CODE WORK BETTER

In 2003 the Panel consulted with interested parties on changes to the Code and subsequently recommended a number of technical changes to the Minister of Commerce late that year. The changes recommended range from a few proposals which aim to clarify the wording of the Code, to several proposals designed to make the Code work more efficiently in certain circumstances. None of the proposals would change the basic structure of the Code. Nor is there any change in the underlying policy of the Code. All the proposals result from the market’s experience with the operation of the Code in the first three years it has been in force. The Panel’s proposals are currently being considered by officials of the Ministry of Economic Development and the Panel is assisting this process as required. The Panel hopes that the changes will be implemented early in the 2004-2005 financial year.

FINANCE

Budgeting for the Panel’s activities is difficult. The Panel’s income is split between its Government grant and third party income received under the Takeovers (Fees) Regulations 2001. Third party income cannot be reliably estimated as it is dependent on the level of takeover activity and also the outcome of enforcement action. For example, the cost of meetings under section 32 of the Takeovers Act in some circumstances is borne by a party to the proceedings but it can also be an expense to be borne by the Panel. In the last financial year the Panel incurred a deficit of $26,306. Surpluses from previous years have covered this deficit but these surpluses are not at a level to absorb continuing deficits. It is clearly important that the Panel be appropriately funded so that it is not inhibited in the performance of its role under the Code and the Takeovers Act.

IN CONCLUSION

To fulfill its role it is important for the Panel to keep in touch with market participants and their advisers. During the year it has continued to work in this respect by issues of Code Word, maintaining its website with relevant and current material, and the meetings it has hosted with various groups of advisers.

I am grateful to the members of the Panel for their hard work, often for long hours and at times that are personally inconvenient. Their willingness to do this is critical to the Panel’s ability to respond to market issues in a swift and timely fashion. I am also grateful to the Panel’s executive for their dedication and commitment to making the Code work.

J.C. King
CHAIRMAN