Annual Report 2007
THE PANEL'S PERFORMANCE IN 2006/2007
The Panel's overall objective is to be an effective and efficient regulator of the takeovers market in New Zealand, respected by market participants. The Panel believes it has achieved that objective in 2006/2007 by its performance in the areas described below.
Improving the relevance and effectiveness of the Code
The impact the Panel is seeking to achieve by its policy review work is to improve the relevance and effectiveness of the Code. It has achieved this in the past year by working closely with the Ministry of Economic Development and Parliamentary Counsel Office to finalise and refine a large number of technical amendments to the Code. These technical amendments finally came into force on 1 July 2007.
The Panel also worked closely with the Ministry of Economic Development and the Securities Commission to provide input into aspects of the Securities Legislation Bill (which later became the Takeovers Amendment Act 2006) providing for a number of new powers for the Panel and the extension of the scope of takeovers law to specifically deal with misleading and deceptive conduct in takeovers.
Some of these provisions have not yet come into force because they await enabling regulations affecting various securities law aspects of market manipulation. The Panel will continue to support the promulgation of these regulations by providing input and comment to officials on various draft regulations.
The Panel also responded promptly to the transaction in the market involving the effective takeover of Waste Management Limited by Transpacific Group of Australia, using a cash takeover effected under the amalgamation provisions of the Companies Act.
The Panel initiated an urgent review of the law governing schemes of arrangement and amalgamations under the Companies Act as it applies to the change of control of code companies. The Panel issued a consultation paper and subsequently made recommendations to the Minister of Commerce and to the Select Committee of Parliament considering the 2006 Business Law Reform Bill. Unfortunately the Panel's proposals were considered outside the scope of the Bill. The Minister has since asked the Panel to undertake further policy work on the issue.
The effectiveness of the Panel's contribution to this law reform function is demonstrated by the fact that 95% of the Panel's recommendations have been converted into law. The Panel supported its efforts on law reform by undertaking ongoing monitoring of developments in the takeovers market both in New Zealand and overseas.
Enforcement of the Code
The intended impact of the Panel's work on enforcement of the Code is the overall improvement in compliance with the Code. The purpose of this work is so that market participants can be confident that they are operating in a well-regulated market. Efficient market mechanisms to achieve changes of control of companies in a fair and efficient way are an important element of the Government's economic transformation objective.
One measure of the Panel's role as an enforcer of takeovers law is that there were no section 32 meetings held during the year. Where compliance issues were identified by or to the Panel that had the potential to lead to a meeting under section 32 of the Act, the market participants involved tended to amend their behaviour or approach to a particular matter such that the Code no longer had the potential to be breached.
At a detailed level the Panel reviewed all formal takeover documents, often at a draft stage, which contributed to a high level of compliance with the law by the time documents were formally sent to shareholders. The Panel was also actively involved in the review of notices of meeting and reports where Code transactions were being put to a company meeting for approval by shareholders under the Code.
There was an unprecedented number of takeover notices received during the year (23).
In the broader field of enforcement the Panel carried out its policy of intervening where a scheme of arrangement involving the change of control of code companies came before the Courts. While ultimately unsuccessful, the hearings in the High Court and subsequently in the Court of Appeal relating to the Dominion Funds Group in general terms confirmed that the Panel had a right to appear and be heard in Court or to make submissions on such proposals.
Although the Panel is aware, in some instances from exemption applications covering past breaches, that breaches of the Code have occurred, this is likely to be because many shareholders of listed and unlisted companies covered by the Code do not realise the way in which the Code can apply to quite small transactions affecting quite small shareholdings.
The Panel is confident that its enforcement activities are resulting in improved levels of
compliance with takeovers law.
The granting of exemptions
The intended impact of the Panel's exemption function is the improvement in the functioning of the takeovers market by alleviating unintended or unreasonable consequences arising from strict application of the Code or allowing otherwise legitimate but Code non-compliant transactions to proceed in ways that are consistent with the objectives of the Code.
The Panel has granted a range of exemptions during the year. It has also declined a number of exemptions, although fewer than in some previous years. We expect this is because the market is now more aware of the Panel's approach to the granting of exemptions (which must be both appropriate and consistent with the objectives of the Code before they can be granted).
In exercising its exemption function the Panel aims to meet the timing needs of the market. In the past year it has managed to achieve this in most instances. Some exemption applications are processed within one week. Other applications may take many weeks to process, often because of their complexity and the need to obtain additional information.
There were 29 exemption applications processed during the year.
Overall the Panel is of the view that the responsible exercise of its powers is contributing to a more efficient market. Some takeovers would not have been able to proceed in their final form without a Panel exemption.
The approval function
The Panel is required to approve the appointment of independent advisers for takeovers and other transactions effected under the Code. The intended impact of the Panel's approval function is the improvement in the quality of advice given to recipients of takeover offers and to shareholders entitled to vote to approve Code-related acquisitions and allotments.
The Panel applies criteria relating to both competence and independence before approving advisers to prepare reports under the Code. The Panel also reviews all adviser reports in draft form before they are sent to shareholders to assess their quality and to see if they adequately address relevant Code and other merits issues.
During the year the Panel processed 56 applications for approval as independent adviser, of which 4 were declined. This was a high number of applications, reflecting the level of takeover activity underway in the final months of the financial year. The Panel had anticipated processing 40 applications. The Panel aims to process 80% of these applications within 3 working days of receiving a complete application. It achieved this in 91% of cases through the year.
During the year the Panel has been taking an initiative to remove references to "fairness" from independent adviser reports on takeover offers and other Code transactions. This initiative has been largely successful. Reports now concentrate on merits, and target company directors can no longer rely on the adviser concluding that an offer is fair or otherwise when formulating their recommendations to shareholders. This initiative is part of the reason why the Panel is developing a third edition of its Guidance Note about the role of Independent Advisers for the purposes of the Code. This Note is expected to be published early in 2007/2008.
The Panel is measuring its impact on the quality of adviser reports by tracking the number of comments it makes on each draft adviser report. The aim is to reduce the number of comments to 2 per report. Over the year as a whole the average number of comments on each report has been 2.44 comments per report. However, only 55% of draft reports reviewed by the Panel executive had 2 or fewer comments made on them. This is disappointing.
Promoting public understanding of the law and practice relating to takeovers
The intended impact of the Panel's function of promoting public understanding of takeovers law is the improvement in public understanding of takeovers law over time.
In the past year the Panel has published four editions of its newsletter Code Word. One issue was devoted to the changes arising from the Takeovers Amendment Act 2006, one to the technical changes to the Code and one to the Panel's court proceedings involving the scheme of arrangement promoted by the Dominion Funds Group. The remaining edition dealt with a number of exemption matters and included a tribute to the former Chairman of the Panel, John King, who retired from that position in March 2007.
The Panel aims to publish information about significant changes to the law within a month of those changes occurring and has met that objective in the past year.
The Panel also keeps its website up to date with a complete record of all its exemptions, policies, publications and important enforcement decisions.
The Panel is confident that the resources it is putting into promoting public understanding of takeovers law is improving the public's knowledge of takeovers law.
International liaison
The intended impact of the Panel's international activities is the improvement in the level of co-operation and understanding between international takeovers regulators.
The Panel's Chairman is a member of the Australian Takeovers Panel and a member of the Australian Panel has been a member of the New Zealand Panel through most of the financial year. In addition, the Panel's Counsel visited the Australian Panel and the offices of the Australian Securities and Investments Commission in March 2007.
These arrangements and visits help promote a greater level of understanding between the trans-Tasman takeovers regulators.
Achievement of the Panel's financial goals
The main measure by which the Panel's financial performance can be judged was described in last year's Statement of Intent as the achievement of ongoing financial viability.
For the year ended 30 June 2007 the Panel recorded an overall deficit of $12,640, leaving operating reserves of $333,721 at year end. This is a viable position. The Panel has therefore MET its main financial objective for the year.
Achievement of the Panel's non-financial goals
The Panel set a number of key non-financial measures by which its performance could be judged in 2006/2007.
In the area of improvement in the law relating to takeovers the Panel set itself the objective of having the Minister of Commerce accept 95% of the Panel's proposals for changes to the law. The Panel considers that it has met this standard in relation to its proposals for technical amendments to the Code.
In relation to the exercise of the Panel's enforcement powers the ultimate measure of the Panel's effectiveness is the extent to which the Panel's decisions were challenged in Court and, if challenged, the degree to which the Panel's decisions were endorsed by the Court. The Panel's aim is to have no challenges to its decisions in Court and, if challenged, to have 100% endorsement by the Court. In the event no formal enforcement meetings were held by the Panel and therefore there were no decisions made by the Panel that could be challenged in Court.
In relation to the exercise of the Panel's exemption powers, the aim is to have the Panel's decisions endorsed or accepted by market participants and the media, and for the absence of adverse market comment. During the year there was no adverse public comment on exemptions granted by the Panel. Although the Panel did decline a number of exemption applications in the course of the year generally the applicants for those exemptions understood and accepted the Panel's reasons for their applications being declined. The Panel therefore MET this objective.
In relation to the exercise of the Panel's approval powers, which are aimed at improving the standard of independent adviser reports provided to participants in Code transactions, the aim of reducing to two the number of comments by the Panel per report has NOT BEEN MET. This standard was met in respect of 55% of the reports reviewed during the year. Unfortunately some reports have required a significant number of comments.
The Panel has also aimed for a balance of favourable comments in the media about adviser reports. The Panel was not able to measure compliance with this objective.
In relation to the Panel's function of promoting public understanding of takeovers law, the aim is to have information about law changes published within one month of the law being changed, and within one week of decisions being made. The Panel has MET this target in relation to the two major law changes in the past year and in relation to each exemption promulgated by the Panel.
Directions issued by the Minister
The Panel has not been given any directions under any enactment by the Minister of Commerce during the course of the past year. Because the Panel is an independent Crown entity for the purposes of the Crown Entities Act the Minister is constrained in her ability to give the Panel any formal directions.
Obligations to be a good employer
The Panel does not currently employ any staff of its own. All professional and support staff working for the Panel are employees of the Securities Commission. Readers are therefore referred to the Annual Report of the Commission for reference to how the Commission, as employer of Panel staff, has met its good employer obligations.
Permission to act when interested
There were no occasions during the year when the Chairman of the Panel gave permission to a member, in terms of section 68(6) of the Crown Entities Act, to act in a matter despite being interested in that matter.
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