The Code

The Code was introduced to balance the interests of market participants in respect of changes of control of publicly traded companies.

Prior to the introduction of the Code effective control of publicly traded companies could be passed without the participation of the majority of shareholders. Control could pass by the sale of the shares of a large shareholder without the involvement of remaining shareholders. The Code ensures that all shareholders in publicly traded companies have equal treatment and participation in takeover situations and as a result encourages greater confidence among investors.

The Code was also intended to encourage greater confidence in the integrity of the New Zealand market for international investors.

The Code governs changes of control of companies registered under the Companies Act which:

• are a party to a listing agreement with the New Zealand Exchange Limited (or were a party to a listing agreement in the previous 12 months); or
• have 50 or more shareholders and $20 million or more of assets.

Rule 6 of the Code, referred to as the fundamental rule of the Code, prohibits any person from becoming the holder or controller of more than 20% of the voting rights in a code company except by utilising one of the mechanisms set out in rule 7 of the Code. The two main mechanisms under rule 7 which could be used to effect a change of control of a code company or the acquisition of a code company are:

• Making a code offer; and
• Seeking shareholder approval for an acquisition or allotment of shares that could result in an actual or effective change of control.

The purpose of the fundamental rule and the mechanisms contained in rule 7 is to ensure that if there is to be a change in the control of the code company, all shareholders have either the opportunity to take part in the process and share in any premium paid for control.

In order for an offer, acquisition or allotment of shares which would otherwise be in breach of rule 6 to proceed the change of control must have the support of a specified level of shareholders of the code company as follows:

• An acquisition or allotment must be approved by a resolution of more than 50% of the shareholders of the code company who are entitled to vote and who vote on the relevant resolution at a meeting of shareholders. Parties involved in the acquisition or allotment and their associates cannot participate in the vote.
• A full takeover offer must be conditional on the offeror receiving acceptances which would result in it becoming the holder or controller of more than 50% of the voting rights in the target company.

Whether a change of control is carried out by way of a transaction or allotment approved by shareholders or through an offer, securities in the code company cannot be compulsorily acquired unless the person increasing its control percentage becomes the holder or controller of 90% of the voting rights in the code company¹.

The Code requires that shareholders of the code company are provided with a document² from the code company which includes a recommendation on the offer, acquisition or allotment and a report from an independent adviser (approved by the Panel) on the transaction. This document is intended to provide shareholders with information to enable them to decide for themselves the merits of an offer, acquisition or allotment.

The provisions of the Code are intended to provide shareholders of a code company with certain rights and protections in respect of their shareholdings. Common to all code transactions (whether code offers, acquisitions or allotments) the Code requires that:

• The transaction has the support of a specified level of shareholders;
• Shareholders have sufficient information, including an independent adviser's report, to enable them to consider the merits of the proposed transaction;
• Securities in the code company cannot be compulsorily acquired until a person³ becomes the holder or controller of 90% of the voting rights in the code company.

The Code is intended to provide similar rights and protections for code company shareholders regardless of the mechanism utilised to effect a change of control.

By contrast, the scheme and amalgamation mechanisms provided under the Companies Act permitting parties to effect a change in respect of the code company may avoid the Code do not provide the same rights and protections.

We set out briefly below the provisions of the Companies Act relating to amalgamations and schemes of arrangement and outline the relationship of these provisions with the Code.

Footnotes

1. The corollary of this requirement is that a person holding more than 10% of the shares of the code company can block the compulsory acquisition provisions.
2. In the case of an offer, a target company statement, and in the case of an acquisition or allotment of shares a notice of meeting.
3. Or two or more persons acting jointly or in concert