Scale, scope and effects

76. There are some 474,000 registered companies subject to the New Zealand Companies Act. The Code is concerned with New Zealand registered companies that have voting securities quoted on a registered exchange's market and those companies that have 50 or more shareholders. The Code therefore covers a small subset of all registered companies:
    1. as at November 2007, the NZSX and NZAX markets had 136 New Zealand Code companies listed⁶
    2. according to the Companies Office database, there are currently 218 unlisted New Zealand Companies with 50 or more shareholders (and a total of 543 companies that indicate they have 'extensive' shareholders).
77. The Takeovers Code only pertains to one specific event (a change in corporate control) among many events that affect the performance of a company. The focus of the Panel and this discussion paper is about the process surrounding changes in corporate control and the opportunity for all shareholders to participate in that event, particularly when it may result in a compulsory acquisition of shares.
78. Since 1 July 2001 the Takeovers Panel has:
    1. recorded a total of 97 offers, 13 for partial control and 84 for full control; that is around 14 offers for full control per year; many of these involved compulsory acquisitions
    2. granted 2 exemptions from the Code for schemes of arrangement undertaken under the Companies Act
    3. become aware of four completed amalgamations or schemes that appeared to be used deliberately to avoid the Code (as well as a number of such proposals and recent attempts).
79. In the 2006/07 year, the Panel recorded 23 takeover notices and 29 exemption applications (but these exemption applications were not related to schemes or amalgamations), and made one application to appear in the High Court regarding a scheme (Annual Report 2007).
80. While it is not known how the use of amalgamations and schemes has impacted on shareholders in monetary terms, the Panel is concerned that circumvention of the procedures provided by the Code has adversely affected the rights of shareholders in Code companies to participate in crucial decisions about changes in corporate control, regardless of the substantive outcome.
81. Considering the information in paragraph 76, above, it seems likely that the Code covers only a small minority of New Zealand companies - although the companies covered by the Code are New Zealand's most substantial companies.

Summary of the problem

82. Although the outcome of an amalgamation or scheme can be the same as a successful full takeover offer that goes to compulsory acquisition, the requirements of the Code are designed to be fairer, to provide equality of treatment and to give shareholders in the target company greater protection from the potential adverse consequences of a change in control:
    1. the shareholder approval thresholds for amalgamations and schemes are in effect lower than for Code offers
    2. shares can be compulsorily acquired at a significantly lower approval threshold under an amalgamation or scheme than is provided in the Code
    3. shareholders receive generally inferior information in respect of a proposed amalgamation or scheme than they would in respect of a Code offer
    4. the Code provides for a longer time period to consider an offer, whereas under an amalgamation or scheme approval can be attained at a single meeting
    5. under the Code the consideration and terms of the offer must be on the same terms regardless of the size of the shareholding, but there are no such constraints in the case of an amalgamation or a scheme
    6. the Code provides for a complaints vehicle at a nil or a relatively low cost to aggrieved parties, whereas under the Companies Act complainants may face legal and Court costs.
83. However, the Panel recognises that an important element of the reconstruction provisions is the requirement for board approval of an amalgamation or a scheme before it is put to shareholders. Sometimes this may be anti-competitive. Sometimes this may be value-enhancing. Boards have statutory duties such as the requirement to act in the best interests of the company. Yet the Panel's concerns are not so much that the outcome of a scheme or an amalgamation may be undesirable. Rather, the Panel's concern focuses on the process that is adopted to achieve the outcome.
84. The use of the reconstruction provisions may create benefits for the offeror and for at least some of the shareholders of the target company:
    1. greater certainty of outcome - one shareholder meeting determines the success or failure of the proposal, unless offers are conditional
    2. greater speed (although there have been instances of lengthy conditionality to proposed amalgamations that could see months pass before the outcome is known)
    3. possibly lower direct cost, for example, because of different prescribed information requirements or different legal fees. (Please note however that the Panel is looking for submitters to help with this information).
85. Potential costs arising from the ability to circumvent Code requirements might be that such circumvention -
    1. undermines the integrity of the market, resulting in fewer market participants than otherwise, which can adversely affect allocative efficiency and market liquidity
    2. raises the risk premium associated with investing in New Zealand, hence discounting share values
    3. generates waste, as companies spend resources on structuring transactions in such a way as to enable the use of legal loopholes, rather than productive activity
    4. results in a lower share price, as reduced competition in friendly 'takeovers' essentially forecloses other offers
    5. results in unequal consideration for some shareholders
    6. results in a pressured decision or compulsory acquisitions at too low a threshold, so that some shareholders sell (under a compulsory process once the approval threshold is met) at a price that is lower than one at which they would have wished to sell.
86. The latter two potential effects affect the distribution of wealth (equity), but not total wealth (efficiency). In principle, transfers of wealth from one to another group cancel out in a cost benefit analysis of the impact of a policy on societal welfare. There may be policy or political reasons to weight one group's interests higher than others, in particular when this involves the protection of individual property rights and enables the participation by all shareholders in decisions on the merits of a control-change transaction.
87. When in 1999 NZIER studied the impact on the value of shares following takeovers of 40 listed companies over the period of 1995-1997 it found that:
    1. with only one or two exceptions takeovers were beneficial for all shareholders
    2. the positive impact of a takeover on share prices persists over time, meaning that shareholders who did not participate in the takeover decision at the time were not disadvantaged if they sold later
    3. in the vast majority of cases the same offer was made to all shareholders, not just to those with controlling stakes
    4. in cases where a separate offer was made, the price was usually the same (but there were instances of higher and lower prices offered to minority interest following an independent determination)
    5. shareholders in target companies enjoyed a premium where the bid was for 100% instead of bids for a controlling share of less than 100%.
88. While economic outcomes are important, the Panel puts particular emphasis on ensuring procedural fairness. The Panel regards the Code's procedures as prescribing a minimum standard. It is therefore concerned that where alternative procedures are used they can give rise to an inferior process with negative effects on shareholders' rights.
89. The Panel also regards certainty of process to be of value and is thus concerned about the effect of 'forum-shopping' on the integrity of the New Zealand market place.
90. Furthermore the Panel believes that the use of the reconstruction provisions to effect changes of control of Code companies may not be consistent with the intent of the takeovers legislation, as:
    1. the Code provides that parties cannot choose to contract out of the Code
    2. the Panel can only grant exemptions from compliance with the Code if to do so would be appropriate and consistent with the objectives of the Code.
91. As a consequence the Panel believes, on balance, that having the ability to use the reconstruction provisions of the Companies Act to bring about changes of control of Code companies is a significant problem.
92. The remainder of this paper discusses alternative ways of addressing this problem.

Footnotes

6. Listed companies that have only debt securities quoted are not Code companies (unless they have 50 or more shareholders).
7. This number of unlisted companies with 50 or more shareholders should be treated as a potentially arguable ballpark estimate only, as the Takeovers Panel has had some involvement with a number of unlisted Code companies that are not shown in the Companies Office database list. Thus, for unknown reasons the match is clearly not perfect and there may be significantly more than 218 unlisted Code companies in New Zealand.