ANNUAL REPORT 2002
CHAIRMAN’S REVIEW
John King
THE CODE COMES INTO FORCE
The Takeovers Code has been operating for one year. The commencement date, 1 July 2001, was a Sunday, and on that day at 9:30am a division of the Panel held its first meeting in connection with the contested bid for Montana Group (NZ) Limited. Later that day the Panel gave its first notice calling a meeting under the enforcement provisions of the Code accompanied by the first restraining order. After little more than a week the Panel had called a further enforcement meeting and issued more restraining orders. It was a demanding start but it signalled clearly to the market that the Panel was up and operating and willing to exercise its powers outside normal working hours where necessary.
The Code has had a very successful introduction. It has been well received by most people, with some very positive and supportive comments about its operation even from former opponents of the Code. Media commentators have generally approved of the Code’s operation in practice. Takeovers are taking place in an orderly fashion and investors are being kept well informed.
ACHIEVEMENTS IN 2001-2002
Preparations for the Code > The smooth introduction of the Code was due to a
considerable extent to the Panel's preparatory work before 1 July 2001. The market
was informed about the Code through the Panel’s website and newsletter, Code Word,
for several months before it took effect. Class exemptions, a standard form of
exemption applying to common classes of transactions, were in place by 1 July 2001.
The Securities Commission also assisted by granting an exemption from certain
requirements of the Securities Act 1978 to facilitate takeovers where securities form
all or part of the consideration.
Policies formulated > The Panel has published several policies relating to the Code
and its application. These included policies on the approval of independent advisers,
the appointment of experts and the receipt of takeover documents. Guides to
applying for an exemption from the Code, for approval to act as an independent
adviser, and for appointment as an expert, were also published.
Approvals under the Code > The Code requires reports from independent advisers
in various circumstances. The independent adviser’s report is of fundamental
importance. It is a report on the merits of the offer, allotment or acquisition, and is
not simply a valuation. Before approving the appointment of an independent adviser
the Panel must be sure that the person is, and is seen to be, independent and has the
appropriate qualifications for the task. The Panel received 42 applications for, and
approved the appointment of 35 independent advisers. Four applications were
declined and three were withdrawn. The Panel also approved two requests for
withdrawal of takeover offers.
In certain circumstances the Code requires an expert appointed by the Panel to make
a determination in relation to the price at which compulsory acquisition of the last
10% of a company’s shares is to be effected. The Panel was not required to appoint
any experts during the year.
Exemptions from the Code > It is recognised that from time to time there may be
technical difficulties in complying with the Code which create the need for
exemptions. Dealing with applications for exemption is an important activity of the
Panel. The Panel will only grant exemptions that are appropriate and consistent
with the Code. Where necessary, exemptions are subject to conditions that ensure
that the underlying purpose and intent of the Code is fulfilled. By law the Panel is
required to give reasons for granting an exemption which must include why it is
appropriate to grant the exemption and how the exemption is consistent with the
objectives of the Code. All exemptions, and the Panel’s reasons for granting them,
are published on our website.
Class exemptions exempt any class of person, transaction or offer from compliance
with any particular provision of the Code. Class exemptions reduce significantly the
need for individual exemptions. The first class exemption notice was gazetted and
could be relied on when the Code came into force. This notice provides a standard
form of exemption to apply to common classes of transactions. The Panel granted
further class exemptions during the year. One of these applies to trustee corporations
and another was for offers unconditional as to level of acceptances. The Panel
considered 32 applications for individual exemptions. Of these 14 were granted and
two were approved but withdrawn by the applicants before gazettal.
Enforcement of the Code > The Panel is in a strong position regarding enforcement.
Where a breach of the Code is suspected it has the power to call a meeting and issue
restraining orders. Following that meeting, if the Panel is not satisfied that the Code
is being complied with, it may seek the appropriate Court orders. Other parties may
apply to the Court only in limited circumstances. The Takeovers Act aims to ensure
that those opposed to a particular takeover should not be able to use the litigation
process to frustrate the takeover.
The contested takeovers of Montana Group (NZ) Limited in July 2001 and Otago Power Limited in May and June 2002 called for significant involvement of the Panel. These contests for control showed that the Panel was prepared to take action both on its own initiative and at the request of other parties. The Panel also intervened in the purchase of 55.98% of the issued shares in Seafresh New Zealand Limited by four buyers acting in concert.
The Panel called 10 meetings under section 32 of the Act where it considered parties may not have complied with the Act or the Code. Determinations were published after each meeting. The Panel issued 13 restraining orders. The Act imposes severe time constraints on the Panel when dealing with matters under section 32. When a meeting is called it must take place within seven days. Once the meeting is held a decision must be made within two days otherwise any restraining order will lapse.
In the first year of the Code’s operation the Panel has dealt with many first time
issues including
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differential pricing offers which are not permitted; |
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application of the transitional provisions in section 23(b) of the Act; |
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actions by directors of a target company which may be construed as defensive
tactics; and |
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procedures for variation of an offer not in compliance with the Code. |
The Panel's decisions have been accepted and non-complying behaviour rectified.
The Panel has not yet had to use its powers to seek either orders or pecuniary
penalties from the Court. As a result, the Panel has not made any calls on its
litigation fund.
In fulfilling its enforcement role, the Panel does not take a narrow legalistic
approach to the interpretation of the Code, but seeks to interpret and apply the Code
in accordance with its underlying policy and intent. It can be expected that the
Panel will look to the commercial substance of events.
Review of takeover documents > Most takeover documents are required to be sent
to the Panel. The Panel is not obliged to vet those documents, but the executive
generally reviews them for compliance with the Code. In a case of non-compliance the Panel decides what action, if any, to take. The Panel received and reviewed 18
takeover notices (of which 14 proceeded to takeover offers) and nine sets of
documents provided to meetings of shareholders for the purposes of the Code.
Accurate disclosure in accordance with the requirements of the Code is of
fundamental importance. It has been necessary for the Panel to highlight that all
directors are responsible for disclosure in the target company statement. Although a
group of independent directors may be managing the process for the target company,
this does not absolve the other directors from their responsibility to make full
disclosure especially of information which may pertain particularly to them.
Public understanding of the Code > The Panel is committed to making its decisions
and the reasons for them widely known. Five issues of Code Word have been
published which contain our policies, guidelines for applications and comments
on Panel decisions. This information is also readily available on our
website, www.takeovers.govt.nz. All relevant legislation, exemptions and Panel
determinations are published in full on the website. We have undertaken a series of
feedback sessions with commercial lawyers and advisory firms who deal with the
Panel. These have been very useful and we intend to continue them. The Chairman
has taken opportunities to speak at seminars during the year and to publish articles
on the Code. The Code and the Panel’s activities were widely reported in the news
media. Panel staff responded to 232 inquiries from the public.
International liaison > The Minister of Commerce appointed Denis Byrne,
a member of the Australian Takeovers Panel to the New Zealand Panel and
Chairman John King was appointed to the Australian Panel. There is no doubt that
this trans-Tasman involvement fosters relationships between the Panels and
increases understanding of the regimes operating in each country. The Director of
the Australian Takeovers Panel, Nigel Morris, spoke at a seminar in Auckland earlier
this year. The New Zealand Chairman visited Australia and met with Senator
Ian Campbell, Parliamentary Secretary to the Treasury, and with the Chairman and
Executive of the Australian Securities and Investments Commission.
LEGISLATIVE CHANGES IN FUTURE
The Securities Markets and Institutions Bill was reported back to Parliament by the
Finance and Expenditure Select Committee in June 2002. The Bill, as reported,
envisages increased powers for the Panel to conduct inspections, summon witnesses
and to accept and enforce written undertakings. It will also remove the Panel's
exclusive role to formulate amendments to the Code. This role will rest with the
Minister of Commerce subject to consultation with the Panel. The Panel will retain
the function to keep under review the law relating to takeovers and to recommend
to the Minister any changes it considers necessary. The Bill also proposes increases
in the number of Panel members from eight to 11 while removing the existing
provisions for three associate members. The Bill was not enacted when Parliament
rose for the general election.
ADMINISTRATION
The Takeovers Panel is provided with executive, administrative and support services
by the Securities Commission under a Memorandum of Understanding. The Panel
does not directly employ its own staff. Under its arrangements with the Commission
the Panel initially sought three full-time equivalent (FTE) professional staff from the
Commission. This has not proved adequate and usage throughout the year has
averaged 3.7 FTEs. The Panel is seeking an increase to approximately 5.5 FTEs in
the coming year. The Panel has a good working relationship with the Commission
and appreciates the support that it provides to the Panel.
WORKLOAD OF THE PANEL
The Panel's role under the Code is demanding, particularly in relation to exemption
and enforcement matters. Exemptions are often complex but need urgent action to
fit in with deadlines for company meetings or takeovers that are under way. The
Takeovers Act puts extraordinary time pressures on enforcement action. When
takeover activity is happening, the decision on whether to call a meeting under
section 32 needs to be made without delay. Once called, the meeting must be held within seven days. During that time the parties make written submissions and
provide supporting information which is reviewed by the Panel and circulated
between the parties. The meeting is then held and, as any interim restraining orders
expire two days after the meeting, the full written decision needs to be made within
that time.
These requirements place enormous strains on Panel members and executives and
can only be met with many hours of work often outside normal business hours.
It means that Panel members, notwithstanding their own business activities, with
little if any notice, may be required to be involved with enforcement matters for 10
or more consecutive days. With only eight members, one of whom is in Australia,
demands on individual members are very high. The situation is equally demanding
and stressful for the Panel's executive. I pay tribute to members and to the executive
for the way in which they have coped with their responsibilities.
Panel members must have genuine experience in the market to be able to make
quality decisions within tight timeframes. They must also be available virtually on
call. These requirements make resourcing the Panel quite difficult and raise the
question of what is an appropriate level of remuneration for members. The proposal
to increase the number of members to 11 is welcome.
Market demands for approvals, exemptions and enforcement, and the resourcing
constraints of the Securities Commission, have delayed some of the Panel's other
intended activities. In particular we have not been able to make as much progress as
we would have liked in identifying areas for improving and recommending
amendments to the Code. We expect to have increased resources next year and to
undertake an expanded workload.
FINANCIAL POSITION
Parliament appropriated the Panel $822,000 for the year for operational
requirements and $675,000 for a litigation fund. The Panel also anticipated fee revenue of $120,000 for the year. As the financial statements show, the Panel
received or accrued fee revenue of $551,000 and disclosed an unexpected surplus of
$266,000 for the year. The Takeovers (Fees) Regulations 2001 enable the Panel to
recover costs for approvals, exemptions and, in certain circumstances, for section 32
actions. Recoveries under the fees regulations were higher than expected.
Furthermore the resource constraints have restricted some of the Panel’s research,
policy and other activities unrelated to the demands of market activity thereby
reducing unfunded expenditure and contributing to the surplus. The surplus is
being carried forward to provide additional resources for an anticipated increase in
workload, taking into account that the Panel's baseline funding for 2002/2003 has
not been increased.
CONCLUSION
The Panel has had a successful first year in its role of facilitating and enforcing the
Code and achieving its policy objectives. However it is still early days. The Panel
must remain vigilant and identify any adverse developments which occur in the
takeovers market.
J.C. King
CHAIRMAN
