Takeovers Panel

CLASS EXEMPTIONS FOR BUYBACKS

A CONSULTATION PAPER ISSUED BY THE TAKEOVERS PANEL

May 2009

ANALYSIS OF PREFERRED OPTION
  1. The advantages and disadvantages of the preferred option are discussed below. The Panel would be grateful for submissions addressing the extent to which consultees agree or disagree with the analysis. In particular, the Panel would like to know why a consultee disagrees, and what their own analysis would be.

Advantages

  1. Under the preferred option each of the 5 identified issues would be resolved. More particularly:

Issue 1 (Changes in ownership of exempted corporates) - this issue would be resolved by making it a condition of the clause 4 class exemption that if there was proposed to be an effective change in the control of a corporate exempted person the details of the exempted person's permitted control increases under the buyback would be disclosed in the notice of meeting sent to the Code company shareholders for deciding whether to approve the effective change of control of the exempted corporate shareholder. As a result, shareholders would be able to make their decision on whether to give their approval on a more fully informed basis;

Issue 2 (Shareholder approval given under "point in time" disclosure) - this issue would be resolved by making it a condition of the clause 4 class exemption that for buybacks occurring over a period of more than 12 months the details of the exempted person's permitted control increases are disclosed in each annual report of the Code company during the life of the buyback and that any website maintained by the Code company had up-to-date disclosures about the ongoing increases in control of an exempted person for the duration of the buyback. This measure would ensure that the market remains informed of the increase in control of the exempted person that has occurred since the last annual report. The market would also have up-to-date information about the exempted person's on-going increases on a similar basis to the SSH notice regime (in respect of Code companies that run a website). While for listed Code companies this requirement may be able to be met by posting their SSH notices (or, better, a plain English summary of their SSH notices) on their website, for unlisted Code companies this would be a new requirement that would give the market access to more information than is currently available. As a result shareholders of the Code company and investors in the secondary market would be able to make their investment decisions on a more fully informed basis. "Point in time" disclosure would also be enhanced through including the new terms and conditions allowing exempted persons to increase their voting control during the buyback term by means other than under the buyback, subject to obtaining the required shareholder approvals and disclosing the maximum percentage of voting securities which could be held or controlled by the exempted person (and their associates) as a result of the buyback and the other increase. These new terms and conditions would give the clause 4 class exemption a much greater flexibility in respect of exempted persons wishing to increase their voting control during a long term buyback programme otherwise than as a result of the buyback. The disclosure requirements would ensure that shareholders would have all relevant information about potential maximum control increases, for making their decision as to whether or not to approve of the other increase;

Issue 3 (Basis for disclosures not defined) - this issue would be resolved because assumptions such as the date at which the number of shares of the company on issue should be calculated would be defined in the exemption;

Issue 4 (Wording of clause 4(2)(a) unclear) - this issue would be resolved by clarifying that the shareholder approval is for the purposes of the clause 4 class exemption. Thus, market participants wanting to rely on the clause 4 class exemption would have a better understanding of how it operates; and

Issue 5 (Uncertainty over whether multiple resolutions permitted) - this issue would be resolved by clarifying that a person is entitled to vote in favour of a resolution relating to another person's voting control increase and therefore multiple resolutions are permitted.

Issue 6 (Incomplete disclosure of maximum voting control of exempted person) - this issue would be resolved by requiring disclosure of the maximum percentage of all voting securities that could be held or controlled by the exempted person (excluding their associates). This would give an immediate and clear picture to shareholders of the potential control position of the exempted person (if the buyback is approved). Accordingly, shareholders could make a more fully informed decision.

  1. The preferred option meets the Panel's objective of ensuring that the class exemptions relating to buybacks operate effectively and efficiently. It would bring more certainty to applicants as to how the class exemptions apply, while providing for fuller disclosure to better inform shareholders deciding whether or not to approve specific voting control increases, that would otherwise breach the fundamental rule. It would also keep shareholders in the secondary market informed.

Disadvantages

  1. Under the preferred option, shareholders relying on the exemption, and the Code company undertaking the buyback, may incur marginally increased compliance costs in relation to the additional information to be included in a notice of meeting for shareholder approval of a change of effective control of a corporate shareholder, or an increased control percentage to be obtained by a shareholder. In addition there would be a marginal increase in costs associated with ongoing disclosures in Annual Reports and of every 1% increase by the exempted person on websites. Unlisted companies do not currently have to make substantial security holder disclosures therefore the compliance costs in relation to the proposed ongoing disclosure requirements would probably be a little greater for them than for listed companies.
  2. The Panel considers that the certainties and increased shareholder information resulting from implementing the preferred option significantly outweigh the minor increase in compliance costs that may be incurred.
SUBMISSIONS
  1. The Panel welcomes your submissions on this paper. Please see the questionnaire at Appendix 3.