ANNUAL REPORT 2003
CHAIRMAN'S REVIEW
John King
The second year of the Takeovers Code has been both interesting and testing. The market's demands for approvals and exemptions, and enforcement activities, have kept us busy. The Panel has endeavoured to act quickly and, despite its few members and small staff, has made and published decisions within tight time frames so as to inhibit the operation of the takeovers market as little as possible.
THE CODE
The Code and its procedures have been tested in various ways. We have identified some areas where minor technical amendments are needed to clarify aspects of the Code and to improve procedures and processes. This, of course, is not a surprise as with any new law some issues are bound to arise. We released a discussion paper in April 2003 with a range of suggested amendments. These changes are technical and do not affect the basic policy and procedures of the Code. We are grateful for many thoughtful comments received from market participants and will proceed to recommend a number of changes to the Code.
EXEMPTIONS
The power to grant exemptions is one of the more important powers given to the Panel under the Takeovers Act. Exemptions deal primarily with technical difficulties where it is difficult or impossible to comply strictly with the express requirements of the Code.
The exemption process does not enable takeover participants to circumvent the need to comply with the Code. The legislation itself makes this clear by requiring the Panel, when granting an exemption, to state why it is appropriate to grant the exemption and why the exemption is consistent with the objectives of the Code.
Two class exemptions of some significance were granted by the Panel this year. The first arose out of the bid by PPCS Limited for Richmond Limited where uncertainty as to the effect of the Code was caused by High Court orders forfeiting and, in particular circumstances, suspending certain voting rights. These orders have not yet taken effect because of an appeal to the Court of Appeal. The Panel granted an exemption to enable the sale and purchase of shares in Richmond Limited to continue, with market participants being aware of the effect of the Code on any such purchases in the event of the Court orders taking effect in their original form.
The second class exemption, which is expected to come into force in August 2003, is to facilitate takeovers involving offers of scrip by enabling small shareholders to receive cash where the scrip offer could result in the allotment of unmarketable parcels of shares. The Panel had previously granted a similar exemption in relation to a particular takeover. However, it was appropriate that the exemption apply to all offers that involve the issue of scrip.
30 applications for individual exemptions were received, of which 14 were granted.
INDEPENDENT ADVISERS
The role of independent advisers is fundamental to the Code's operation. An independent adviser's report is required with both full and partial takeover offers, for shareholder approvals of acquisitions and allotments under rules 7(c) and 7(d), and also for increases in voting control as a result of a buyback under clause 4 of the generic class exemptions.
The report is intended to ensure that shareholders are well-informed about the takeover or transaction before they decide to support or reject it. The Panel takes a close interest in the skills as well as the independence of any company, firm or individual proposed for appointment as an independent adviser, and monitors the performance of independent advisers in meeting their responsibilities.
On some occasions this performance has been disappointing. Independent advisers have not always fully informed shareholders of the protections which they enjoy under the Code and the advantages and disadvantages that may flow, not only from supporting the proposal, but also from declining the proposal.
The Panel has published a guidance note to assist independent advisers in preparing reports. Panel members have also held meetings with representatives of most advisory firms. The Panel encourages smaller professional corporate advisory and accounting firms to develop skills in this area.
The directors of the target or Code company also have important responsibilities in connection with independent adviser reports. From some of the reports it has seen, the Panel believes that not all directors appreciate the extent of those responsibilities. Directors need to ensure that the appointed adviser is given all the information necessary to provide a comprehensive report on the merits of the proposal. They should, in the course of reviewing the independent adviser's draft report, try to ensure that it is comprehensive and covers all the relevant issues. They cannot, of course, influence the adviser's views as to the merits of the proposal. The Panel processed 40 applications for approval of independent advisers, 34 of which were approved.
ANTI-AVOIDANCE
The Panel has published a detailed explanation of the anti-avoidance provisions of the Takeovers Code. These provisions are designed to ensure that the Code is not circumvented by sophisticated structuring of corporate vehicles. It was apparent to the Panel that the effect of the Code's anti-avoidance provisions was not fully understood.
ENFORCEMENT
Various issues arose with takeover bids and transactions requiring shareholder approval. The Panel convened six meetings under section 32 of the Takeovers Act dealing with ten separate issues. Three of these meetings involved takeover bids &emdash; GPG Forest Limited's partial bid for Rubicon Limited, Lowe Corporation Limited's bid for Blue Sky Meats Limited, and PPCS Limited's takeover bid for Richmond Limited. Two meetings involved shareholder approvals &emdash; Submarines Australasia Limited and TrustPower Limited. The final meeting concerned the issue of associates and involved Designer Textiles (NZ) Limited. Determinations were published after each meeting. The Panel issued three restraining orders and accepted enforceable undertakings under section 31T of the Takeovers Act in five instances from nine parties.
On two other occasions where a breach of the Code had been identified, the breach was remedied without the need for a section 32 meeting by the party concerned remedying the breach to the satisfaction of the Panel. On two further occasions the Panel issued retrospective exemptions to validate non-complying actions.
In the second year of the Code's operation the Panel dealt with a number of firsttime issues including:
The Panel has not yet had to use its powers to seek either orders or pecuniary penalties from the Court.
In fulfilling its enforcement role the Panel does not take a narrow legalistic approach to implementing 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 DOCUMENTS
Most documents relating to transactions covered by the Code are required to be sent to the Panel. The Panel is not obliged to vet these documents, but the executive generally reviews them for compliance with the Code and will raise any issues with those responsible in an effort to facilitate the efficient operation of the takeovers market. The Panel received and reviewed 12 takeover notices (of which eight proceeded to takeover offers) and 17 sets of documents for shareholder meetings.
PUBLIC UNDERSTANDING
The Panel publishes on its website, www.takeovers.govt.nz, its determinations under section 32 of the Takeovers Act and also the exemptions granted from the Code. The number of visitors to the Panel's website has steadily increased. Four issues of the Panel's publication, Code Word, were published which included:
Members of the Panel and the executive held feedback sessions with legal firms and firms acting as independent advisers and the Chairman spoke at seminars on the Panel's work. Panel activities were widely reported in the news media and 213 inquiries from the general public were answered.
INTERNATIONAL
The Australian Takeovers Panel hosted the first international conference of takeovers regulators in Melbourne in October 2002. Representatives of the New Zealand Panel and its executive attended, together with representatives of takeovers regulators from 18 countries. The conference considered the wide range of issues faced by takeovers regulators and the approaches taken in the various jurisdictions. I expect this initiative will be continued.
I continue to be a member of the Australian Takeovers Panel. Denis Byrne, a member of the Australian Takeovers Panel, continues as a member of the New Zealand Panel. These appointments were made last year.
LEGISLATIVE CHANGES
The Securities Markets and Institutions Bill became law on 1 December 2002 and amended the Takeovers Act 1993. One constitutional change is that the Panel no longer has the power to formulate any amendments or changes to the Code. This power is now vested in the Minister of Commerce. However, the Minister must consult with the Panel and the Panel retains the function of keeping under review the law relating to takeovers and recommending to the Minister any changes to the law that it considers necessary.
An important change is that the Panel now has the power to accept undertakings which may be subsequently enforced by a Court order. The Panel has accepted undertakings since this law change and found it to be an appropriate and flexible way to remedy certain breaches of the Code. Another change is that the Panel can now carry out its own inspections. The Panel's inspection and evidence gathering powers may now be used to assist an overseas regulator to carry out its functions.
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. Currently the Panel and the Commission have agreed on support at a level of 5.6 professional full-time equivalent staff members. 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 restraining orders expire two days after the meeting, the full written decision needs to be made within that time and the restraining orders extended where necessary.
These requirements place enormous strains on Panel members and the executive and are only met by many hours of work often outside normal business hours. Panel members, notwithstanding their own business activities and with little if any notice, may be required to be intensively involved with enforcement matters for ten or more consecutive days.
The amended Takeovers Act increased the number of Panel members from eight to eleven. Subsequently two new members, Sue Suckling and Anthony Frankham, were appointed and I welcome them. I pay tribute to Panel members and to the executive for both the quality and quantity of work they have handled during the year.
FINANCIAL POSITION
Parliament appropriated the Panel $822,222 for the year for operational requirements and $675,000 for a litigation fund. There was one call of a small amount on the fund that was ultimately recouped. The Takeovers (Fees) Regulations 2001 enable the Panel to recover costs for approvals, exemptions and, in certain circumstances, for section 32 actions. The Panel anticipated fee revenue of $385,000 for the year. As the financial statements show, recoveries under the fees regulations were ahead of expectations as the Panel received or accrued fee revenue of $460,870. Costs were less than expected. Resource constraints restricted some of the Panel's research, policy and other activities unrelated to market activity which reduced unfunded expenditure. The Panel's financial statements disclose a smaller than expected deficit of $97,822.
CONCLUSION
The feedback from the marketplace indicates satisfaction with the Code and the performance of the Panel. In general, takeovers are taking place in an orderly fashion and with the information required for shareholders to make an informed decision.
J.C. King
CHAIRMAN