Takeovers Panel

CLASS EXEMPTIONS FOR BUYBACKS

A CONSULTATION PAPER ISSUED BY THE TAKEOVERS PANEL

May 2009

OBJECTIVE
  1. The Panel's objective is to ensure that the class exemptions relating to buybacks operate effectively and efficiently while allowing for fully informed shareholders to decide for themselves whether or not specific voting control increases, that would otherwise breach the fundamental rule, should be permitted.
OPTIONS
  1. The following 5 options have been identified as possible ways of addressing the above issues.

Option 1: Take no action

  1. Under this option, the Panel would take no action to address the issues and the status quo would be maintained.

Why not the preferred option?

  1. While none of the problems identified above appears to be of a very great magnitude, their cumulative effect has a negative impact on the effective and efficient operation of the clause 4 class exemption. As a result, the market is not fully informed (in relation to buybacks that occur over a long period of time). In addition, any uncertainties for Code companies and for shareholders relying on the clause 4 class exemption creates a compliance burden that could be eliminated by taking some action to remedy it.

Option 2: no policy changes but clarify wording of clause 4

  1. Under this option, clause 4 is rewritten to clarify how it is intended to operate (i.e. no substantive changes are made to the clause 4 class exemption). In particular, the exemption would be rewritten to clarify:
    • the assumptions, such as the date at which the number of shares of the company on issue should be calculated, for the purposes of specifying in the notice of meeting the percentage increases resulting from the buyback (for example, the date might be set as the date that is 7 days before the date of the notice of meeting, and it might be assumed that there will be no change to the number of voting securities on issue) (Issue 3)
    • that the shareholder "approval" referred to in clause 4(2)(a) is for Code/Class Exemption purposes only (Issue 4)
    • that multiple resolutions are permitted (Issue 5)
  1. This option requires no policy changes. Therefore none of the compliance burden associated with changes to the law would be incurred by market participants. This option would improve certainty and would result in practitioners being better able to advise their clients, thus would improve the efficiency of the Code from the market's perspective.

Why not the preferred option?

  1. This option does not address Issue 1 concerning changes in ownership of exempted corporates, Issue 2 concerning point in time disclosure or Issue 6 concerning incomplete disclosure of the maximum voting control of the exempted person. This means that shareholders would still not be fully informed when deciding for themselves whether or not specific voting control increases, that would otherwise breach the fundamental rule, should be permitted. Therefore this option does not meet the Panel's objective.

Option 3 - Limit the time over which the clause 4 class exemption could be relied upon and clarify wording in clause 4

  1. Under this option, in addition to rewriting clause 4 to clarify its meaning, as for Option 2, the clause 4 class exemption would be amended to impose a time limit on the time over which the exemption could be relied upon by a person wishing to increase their control percentage, of, say, 12 months (or perhaps 2 years) from the date of shareholder approval.
  2. This option has the benefit of addressing Issues 3, 4 and 5, as provided for in Option 2. It may also indirectly address Issues 1 (changes in ownership) and 2 (point in time disclosure) which arise from the long-term nature of some buybacks by ensuring that disclosures will never be more than 12 months (or perhaps 2 years) old.

Why not the preferred option?

  1. This option is not the preferred option because long-term buybacks are undertaken for legitimate commercial reasons. A time limit of 12 months (or 2 years) would mean that where a buyback was being undertaken over several years, the person seeking to rely on the clause 4 class exemption would need to "refresh" their reliance on it every 12 months (or every 2 years). Such a process would be cumbersome and costly for the exempted person as it would necessitate that, among other things, the person sought shareholder approval (and obtained an independent adviser's report) each 12 months (or 2 years). This would cause a significant increase in compliance costs for such persons and for the Code company. In addition, this option does not address Issue 6 concerning incomplete disclosure of the maximum voting control of the exempted person. Therefore this option does not meet the policy objective of the exemptions relating to buybacks operating effectively and efficiently.

Option 4: Revoke the clause 4 class exemption

  1. Under this option, the clause 4 class exemption is revoked and instead the Panel would grant buyback exemptions on a case by case basis.
  2. This option indirectly addresses all of the issues by eliminating their cause; the class exemption itself.

Why not the preferred option?

  1. This option would be the most heavy-handed approach to take. Revoking this class exemption would mean that the person wishing to rely on an exemption would need to apply to the Panel for a specific exemption. A specific exemption would put the applicant to significant additional expense (the cost recovery charged by the Panel for processing exemptions in this area averages between $5,000 to $15,000 per application depending on the complexity of the particular transaction and exemption). In addition to the Panel's costs, an applicant has their lawyers' fees (which may be greater than the Panel's costs) and the impact on their own time and productivity when dealing with the application. It would also be uncertain whether the Panel would necessarily grant the desired exemption and what conditions the Panel would impose if it did grant the exemption. For these reasons this option does not meet the policy objective of the exemptions relating to buybacks operating effectively and efficiently.

Option 5 -Amend and clarify wording of clause 4 conditions - mirror exemption conditions for rules 15(b) and 16(b) of Code (preferred option)

  1. Under this option, in addition to rewriting clause 4 to clarify its meaning, as for Option 2, the clause 4 class exemption would be amended to incorporate a modified version of the standard conditions that the Panel requires when it grants exemptions from rule 15(b) and rule 16(b) of the Code ("Standard Exemption Conditions")3 as follows:
    1. all relevant voting control maxima are disclosed in the notice of meeting;
    2. full particulars of the buyback are disclosed in the notice of meeting;
    3. the notice of meeting contains a summary of the terms and conditions of the exemption;
    4. the notice of meeting displays a disclaimer that the Panel is neither endorsing nor supporting the accuracy or reliability of the contents of the notice of meeting nor implying it has a view on the merits of the buyback;
    5. the voting control maxima required to be disclosed in the notice of meeting are calculated:
      1. on the basis of the number of shares of the Code company on issue 7 days before the date of the notice of meeting; and
      2. on the assumption that, other than as a result of the buyback, there is no change to the total number of voting securities on issue between the date that was 7 days before the date of the notice of meeting and the completion of the buyback; and
    6. the form of the notice of meeting is approved by the Panel;
    7. if a buyback is undertaken over a period of more than 12 months, disclosures are also made about the control position of the exempted person, in each annual report of the Code company from the date of the shareholder meeting until the buyback is completed. More particularly, each annual report must contain:
      1. a summary of the terms of the buyback; and
      2. a statement, as at the date of the annual report, of -
        • the number of voting securities acquired by the Code company under the buyback;
        • the total percentage of the total voting securities on issue that are held or controlled by the exempted person;
        • the total percentage of the total voting securities on issue that are held or controlled in aggregate by the exempted person and the exempted person's associates;
        • the maximum percentage of the total voting securities on issue that could be held or controlled by the exempted person if the maximum number of voting securities were acquired by the Code company under the buyback;
        • the maximum percentage of the total voting securities on issue that could be held or controlled, in aggregate, by the person and the person's associates if the maximum number of voting securities were acquired by the Code company under the buyback; and
    8. if a buyback is undertaken over a period of more than 12 months and the Code company has a website about itself it must:
      1. disclose on its website the information required to be disclosed under paragraph (g); and
      2. announce on its website any aggregate increase of 1% or more in the voting rights held or controlled by the person since the date of last disclosure.
  2. It is proposed that the clause 4 class exemption also be amended by inserting a requirement that the notice of meeting in respect of the buyback contains a disclosure of the maximum percentage of all voting securities that could be held or controlled by the exempted person alone, as a result of the buyback.
  3. It is proposed that the clause 4 class exemption also be amended by including a condition that there is no effective change in control of the person (if it is a body corporate) until the buyback is completed. However, this condition would not apply if:
    1. the effective change in control was approved in accordance with rule 7(c) or rule 7(d) of the Code (as the case may be) or permitted under another exemption granted by the Panel; and
    2. the notice of meeting required by rule 15 or rule 16 of the Code (as the case may be), also contained or was accompanied by the same information as that required to be disclosed under paragraph 70(g) above, in respect of the buyback, stated as at the date of the notice of meeting.
  4. It is proposed that the clause 4 class exemption also be amended by including additional terms and conditions that, during the buyback term, the person may only increase their voting control by means other than the buyback ("other increase"), if:
    1. the other increase was approved in accordance with rule 7(c) or rule 7(d) of the Code (as the case may be) or permitted under another exemption granted by the Panel; and
    2. the notice of meeting required by rule 15 or rule 16 of the Code (as the case may be) also contained or was accompanied by:
      1. a summary of the terms of the buyback that was approved under the exemption; and
      2. a statement, as at the date that was 7 days before the date of the notice of meeting, of -
        1. the number of voting securities of the code company that the person holds or controls and the percentage of all voting securities of the code company that that number represents; and
        2. the maximum number of voting securities that may be acquired by the code company under the buyback; and
        3. the percentage of all voting securities of the code company that the maximum number of voting securities represents; and
        4. the maximum percentage of the total voting securities on issue that could be held or controlled by the exempted person after the other increase if the maximum number of voting securities were acquired under the buyback; and
        5. the maximum percentage of the total voting securities on issue that could be held or controlled, in aggregate, by the exempted person and the exempted person's associates after the other increase if the maximum number of voting securities were acquired under the buyback.
    3. for the purposes of sub-paragraphs (B) to (E) above the percentages required to be disclosed must be calculated on the basis that:
      1. the exempted person's voting control will increase as a result of the other increase and will increase as a result of the buyback; and
      2. the exempted person's voting control will increase only as a result of the buyback.
  5. It is proposed that the clause 4 class exemption also be amended to provide that where ongoing increases under a buyback, together with the other increase, would result in the maximum percentage of voting securities that could be held or controlled by the person as disclosed in the notice of meeting in respect of the buyback to be exceeded, then the buyback must be approved again by shareholders.
  6. It is proposed that the clause 4 class exemption be amended by inserting words to clarify that a person (and that person's associates) is only restricted from voting in favour of the resolution relating to that person's voting control increase. This would clarify that multiple resolutions are permitted.
  7. A draft of the clause 4 class exemption containing all of the proposed amendments (including additional proposed definitions for the purposes of the clause 4 class exemption) is set out in Appendix 2.

Footnotes

  1. Depending on submitters' views on the proposed new conditions for the clause 4 class exemption, the Standard Exemption Conditions might then be modified to reflect the proposed new conditions for clause 4.