Rule 35 of the Code provides:

"Dispositions
During the offer period, neither the offeror nor any person acting jointly or in concert with the offeror may dispose of any equity securities in the target company other than to an offeror under another offer that is made under this code."

The purpose of rule 35 of the Code is to prevent an offeror, or any person who is acting jointly or in concert with the offeror, from taking steps to defeat the offer by way of disposing of securities it holds in the target company (the offeror could achieve this if it reduced its holding to such a level that it could not satisfy the minimum acceptance condition in its offer).

A problem with rule 35 typically arises, however, where the offeror, who already holds or controls voting rights in the target company, wishes to use a special purpose vehicle or a related person to make an offer under the Code. Rule 35 prohibits an offeror from "selling in" its voting securities into its own offer. Moreover, there may be other persons who hold or control voting rights in the target company and wish to accept into an offeror's offer, but for various reasons may be considered to be acting jointly or in concert with the offeror. In this case, those persons are prohibited from accepting the offer, by rule 35.

There have been six instances to date where offerors have encountered this problem with rule 35. This has led to the Panel granting exemptions for each of these transactions.²⁶ The usual condition to such an exemption is that the offeror, or any other person acting jointly or in concert with the offeror does not dispose of any equity securities in the Code company other than into the offeror's relevant offer or any other offer made by a third party in accordance with the Code.

In short, the exemptions from rule 35 of the Code have been sought and granted because of a drafting anomaly in the Code.

The following options for addressing the problem have been identified.

Under this option, the Panel would continue to grant exemptions from rule 35 on a case-by-case basis. This would not, however, resolve the problem with the Code. The use of a special purpose vehicle to carry out a takeover offer is a relatively commonplace and acceptable commercial arrangement. Likewise, it is not uncommon for shareholders in a target company to be acting jointly or in concert with an offeror (for example, in a management buy-out). The Code ought to facilitate these kinds of transactions, which contribute to an efficient capital market in New Zealand. Rule 35 under its current form acts as an impediment to this. It also increases compliance costs for market participants who are compelled to seek an exemption from the Panel. For these reasons, the Panel believes that it is not optimal to maintain the status quo.

Under this option, the Panel would recommend to the Minister an amendment to rule 35 of the Code along the lines adopted in the exemptions that have been granted. This could easily be achieved as follows:

"35 Dispositions
During the offer period, neither the offeror nor any person acting jointly or in concert with the offeror may dispose of any equity securities in the target company other than to the offeror or to an offeror under another offer that is made under this code."

The proposed amendment would mean that the Panel would no longer need to grant exemptions from rule 35. This would reduce compliance costs for market participants, thereby contributing to a more efficient Code and a more effective capital market.