Annual Report for the year ended 30 June 2008
CHIEF EXECUTIVE OFFICER'S REPORT
The Panel's overall objective is that of being an effective and efficient regulator of the takeovers market, respected by market participants and enforcing a Takeovers Code that provides for equal treatment of shareholders and a transparent takeover process, and to foster confidence in the integrity of our markets. The Panel believes it has achieved that objective in 2007/2008 by its performance in the areas described below.
ACHIEVEMENT OF THE PANEL'S NON-FINANCIAL GOALS
Framework of the Code and Review of Market Practices
The impact the Panel is seeking to achieve by its policy review work is to improve the
relevance and effectiveness of the Code.
Improvements to the Code took effect when a large number of technical amendments to the Code came into force on 1 July 2007. Further improvements were achieved with the coming into force 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. The Panel has now started working on a further set of technical amendments to the Code. At the request of the Minister the Panel undertook a further 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 in December 2007 and made recommendations to the Minister of Commerce in May 2008. The Panel retained the New Zealand Institute of Economic Research to assist with the preparation of its consultation document and to prepare a draft Regulatory Impact Statement to support its recommendations to the Minister.
At the time of completion of this report the Panel's recommendations for changes to the
law were under consideration by the Government. As a result there was no objective
measure available of the Panel's achievement of this goal for the year.
Enforcement of the Code
The intended impact of the Panel's work on enforcement of the Code is the overall
improvement in the level of market compliance with the Code. The purpose of this
activity is so that market participants can be confident that they are operating in a wellregulated
market. The Panel's main enforcement powers are under section 32 of the
Takeovers Act.
The Panel held three section 32 meetings during the year. Two related to transactions in
Kerifresh shares. The third section 32 meeting related to takeover costs in the
Crescent/Abano takeover. In other cases issues were resolved without the need for the Panel
to exercise its formal powers.
There were no court challenges to the Panel's enforcement actions.
At a detailed level the Panel aims to review all formal takeover documents, often at a draft
stage, which contributes to a high level of compliance with the law by the time documents
are 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 a reduced number of takeover notices received during the year (12) compared to
last year (23). Because of other pressures during the second quarter of the year the Panel
was not able to review all takeover documents, in particular not all independent adviser
reports, for a short period.
In the broader field of enforcement the Panel has a policy to intervene where a scheme of
arrangement involving the change of control of Code companies comes before the Courts.
However, there were no known instances of such a scheme during the year.
The new rule 64 on misleading and deceptive conduct came into force on 29 February
2008. The Panel published a guidance note on this rule in December 2007 and to date no
formal enforcement action has been required by the Panel. A number of informal actions
were taken with satisfactory results. We are pleased that market participants are making
efforts to comply with this law.
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 by 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.
In exercising its exemption function the Panel aims to meet the timing needs of the
market. In the past year it achieved 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 from applicants.
Twenty-five applications for individual exemption were processed during the year, plus
two applications for class exemptions (29 and three in 2006/2007). The slightly reduced
number of exemption applications reflects the lower level of takeover activity during the
latter part of the year.
Overall the Panel is of the view that the responsible exercise of its exemption powers is
contributing to a more efficient market.
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 to its decisions as to whether to approve advisers to prepare reports under the Code. The Panel's objective is to review 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 merits issues.
During the year the Panel processed 37 applications for approval as independent advisers, of which two were declined. This was a lower number of applications than the previous year (56), reflecting the reduced level of takeover activity 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 three working days of receiving a complete application. It achieved this in 73% of cases through the year. This reflected the pressures on the Panel executive during the second quarter of the financial year when the Panel executive was below establishment at the same time that the Panel was engaged in two section 32 meetings.
The Panel also processed (and declined) two applications from target companies for approval under rule 39 of the Code to undertake defensive tactics during the course of a takeover.
The Panel published the third edition of its guidance note about the role of independent advisers for the purposes of the Code in August 2007. It is available on the Panel's website.
One of the Panel's important objectives is to improve the quality of information given to shareholders involved in Code takeovers and transactions. The Panel measures 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 two per report. In the 2007/2008 year the average number of comments on each report was 3.3 comments per report, up from 2.4 comments in 2006/2007. Only 47% of draft reports reviewed by the Panel executive had two or fewer comments made on them, compared to 55% the previous year. This was disappointing. In our view it reflects the complexity of a number of transactions commented on during the year, rather than on any reduction in the standard of performance of the advisers.
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 three editions of its newsletter Code Word. The September 2007 issue explained the Panel's thinking behind the third edition (published in August) of its guidance note about the role of independent advisers for the purposes of the Code. Code Word No 22 published in December 2007 covered three topics - the new rule 64 about misleading or deceptive conduct; requirements for facilities for shareholders to conditionally accept a takeover offer; and a guidance note on the term "50 or more shareholders" in the definition of Code company. The June 2008 Code Word covered the Kerifresh matter providing guidance on the application of the Code, the Panel's approach to enforcement and its interpretation of various aspects of the "associates" concept. It also commented on the payment of broker handling fees by takeover offerors, a practice which is becoming more common in New Zealand and is relatively common in Australia.
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 continuing its practice of seeking feedback from the market about its performance. Over the past year the Panel has adopted the practice of inviting market participants to join Panel members during breaks in their regular meetings. This has proved a very successful means of keeping in touch with different areas of the market.
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 Peter Scott, a member of the Australian Panel, has been appointed a member of the New Zealand Panel from July 2008. In addition, the Panel's Chief Executive participated in an international conference of takeovers regulators hosted by the Securities and Exchange Commission in Washington DC in May 2008.
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 2008 the Panel recorded an operating deficit of $45,510, leaving operating reserves of $298,211 at year end. This is a viable position. It excludes the moneys in the litigation fund, which are not available to meet the Panel's operating needs. The Panel has therefore met its main financial objective for the year.
The financial outcome for the year was an operating deficit that was very close to $100,000 less than that expected, coinciding with the amount of additional government funding provided during the year. However, both operating income and operating expenditure (not including the extra government cash appropriation) were nearly $204,000 higher than forecast. The main contributor to the increased revenue was higher than expected cost recovery from enforcement action. In the case of expenditure the largest contributor was expenditure on legal and other experts resulting from the level of enforcement action as well as unbudgeted policy work.
CONCLUSION
This has been a challenging year for the Panel and the executive team. In general terms the Panel has met its financial and non-financial objectives. I am grateful for the dedication and support of the executive team, who have frequently worked under extreme pressure during this year. We have all appreciated the leadership and support of the Panel during the year.
K.G. Morrel
Chief Executive Officer
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