Takeovers Panel
Proposed Amendments to the Takeovers Act: Defining a Code Company
EXPLANATORY MEMORANDUM

Recommendations to the Minister of Commerce From the Takeovers Panel
13 June 2008

Introduction

  1. The Panel has a statutory function to keep under review the law relating to takeovers of the companies that are subject to the Takeovers Code and to recommend to the Minister of Commerce any necessary changes to that law. As part of that function the Panel monitors the efficiency and effectiveness of the Code itself. The Panel listens to feedback from the market about the practical effects of the Code's procedural and substantive rules.
  2. In 2003 and in 2005 the Panel made a number of recommendations for technical amendments to the Code, to resolve practical difficulties that had become apparent in the first few years of the Code's operation. These recommendations resulted in the Takeovers Code Approval Amendment Regulations 2007.
  3. The recommendations that are discussed in this Explanatory Memorandum are part of the Panel's current technical review of the Code. They are related or consequential to recommendations that will be made for changes to the Code (the policy development for which is currently under consideration). The market will be consulted on the proposals for technical amendments to the Code in due course.
  4. The Panel made the recommendations that are set out in this paper to the Minister of Commerce on 16 May 2008. These recommendations were made in conjunction with recommendations on the use of the Companies Act 1993 reconstruction provisions for amalgamations and schemes of arrangement involving Code companies.

Executive summary

  1. The proposed amendments discussed in this paper are all of a minor nature. They are intended to reduce direct and indirect costs to the market by increasing certainty or by removing from the Code's definition companies that were not intended to be included.
  2. The issues relate to the definition of specified company/code company as set out in the Takeovers Act 1993 (the 'TA') and Code. This definition provides that:

    Specified / code company means a company that -
    1. is a party to a listing agreement with a registered exchange and that has securities that confer voting rights quoted on the registered exchange's market; or
    2. was within paragraph (a) at any time during a period specified in the takeovers code (being a period not exceeding 12 months before any date or the occurrence of any event referred to in the code); or
    3. has 50 or more shareholders
  3. Under this definition any company with 50 or more shareholders is a Code company. A recently de-listed company remains a Code company for 12 months after delisting. This Explanatory Memorandum discusses four problems associated with the current definition. The Panel also recommends one other minor amendment relating to a drafting issue in section 8 of the TA, arising out of amendments that were made to the TA in 2006.
  4. The issues are:
    1. The definition of 'specified company' in the Act is the same as the definition of 'code company' in the Code but the difference in terms (specified company/Code company) is unnecessary and confusing. The term Code company is generally used in the market;
    2. Transactions or events that start with the Code should finish with the Code. However, the drafting of the definition of 'code company' creates doubt about that;
    3. The Act does not define the meaning of 'shareholder' for '50 or more shareholders'. There is uncertainty in the market as to whether 'shareholders' means all shareholders whose names are entered on the company's share register, or whether joint shareholders are to be counted as one shareholder;
    4. The '50 or more shareholders' definition catches those shareholders who are holding securities that do not confer voting rights;
    5. In 2006 the Act was amended by splitting, and re-numbering, Part III into Parts 3 and 4. However, section 8 of the Act, which sets out the Panel's functions, retains the old numbering. An argument could be raised that this resulted in a change to the Panel's functions and powers.

Proposal A: Changing 'specified company' to 'code company' in the TA's definition

The issue

  1. In the TA a company that is subject to the Code is called a 'specified company'. In the Code, such a company is called a 'code company.' In both cases the definitions are the same.
  2. The reason for the difference in nomenclature dates back to when the TA was passed - in 1993 - and there was as yet no Code. It was thought that a 'specified company' might be defined more generally in the TA than in the Code, which would allow the Code regulations to define the scope of the term. If necessary, the Code's definition could then be changed more easily than at statute level.
  3. The issue is twofold; first, it seems inappropriate that such a key definition (it defines the entities that are subject to the Code) can be changed in a regulation without the full scrutiny of the parliamentary processes required to change an Act. Second, it is inconsistent and annoying to have two different, defined, terms meaning exactly the same thing.
  4. The market has accepted the term 'code company' and communications from the Panel generally refer to Code companies. The term 'specified company' tends only to be used when the Panel is exercising its enforcement powers or in Court proceedings.1 However the formal enforcement powers of the Panel are used relatively rarely - on average, perhaps once or twice a year - and Court orders have been made under the TA on only one occasion.2 By comparison, the Panel (and more informally the Panel executive) communicates frequently with the market, employing the commonly accepted term 'code company'.3

Alternative options

  1. The options are:
    1. Maintain the status quo (not preferred):
      Retaining the definitions as they are does not resolve the issue of whether the Code company definition should be open to change at regulation level, and the annoyance of having two differently named definitions having the exact same meaning;
    2. Change the 'specified company' terminology in the TA to 'code company' and define it in the TA by reference to the definition of 'code company' in the Code (not preferred):
      This option would require all references to 'specified company' to be changed throughout the TA to 'code company'. While this option would solve the issue of the two different terms having the same meaning (the annoyance issue) it would not address the issue of having important changes potentially being made at regulation level.
    3. Change the 'specified company' terminology in the TA and replace it with 'code company', and have the TA as the only source of the definition of 'code company' (preferred option);
      All references to 'specified company' throughout the TA would be changed, and the definition of 'code company' in the Code would be replaced with a reference to the definition in the TA. A consequential amendment to paragraph (b) of the definition in the TA would also be required.4

Analysis of preferred option

  1. This is quite a minor proposal that would have no costs or other negative impact on the market. It would simply resolve an anomaly in terminology that causes irritation. With a legislative opportunity available, it is timely to resolve it by aligning the terminology used in the Code and TA. The Panel proposes that the definition in the TA should be termed 'code company' as this term has market acceptance and is more apposite to companies that are subject to a takeovers 'code'.
  2. The scope of the definition defines the application of the Code. It seems appropriate that the definition be in the TA only. Accordingly, the current 'code company' definition in the Code would be replaced with a reference to the definition of 'code company' in the TA.
  3. Because this definition defines the persons that are subject to the Code, any changes to the definition should be subject to the direct scrutiny of Parliament. This option addresses both the annoyance factor of two different terms for the same definition, and the appropriateness of defining the Code's application in primary legislation. It also maintains the use of the term that is in common market parlance.
  4. The change in name would mean changes to all references of 'specified company' to 'code company' in the TA.5 None of these changes would be substantive changes; rule 2(3) of the Code would become superfluous and could be removed,6 and paragraph (b) of the definition consequentially amended to remove the reference to the Code specifying the time period for the look-back in respect of recently de-listed companies.
  5. Hereafter in this paper, it is assumed this change is made and all references used are simply stated as 'Code company'.

Recommendation

  1. The Panel recommends:
    1. Replacing the term 'specified company' in the definition section of the TA with 'code company';
    2. Changing all references in the TA from 'specified company' to 'code company';
    3. Removing the substantive part of the definition of 'code company' from the Code and replacing it with a reference to the definition of 'code company' in the TA; and
    4. Revoking rule 2(3) of the Code and consequentially amending paragraph (b) of the definition in the TA to reflect that change.

Footnotes

  1. These powers of the Panel are under section 32 of the TA; since the restraining orders it may make are set out in the TA the term 'specified company' is used. Orders that may be made by the Court are set out in the TA and therefore use the term 'specified company'.
  2. From the Annual Report 2007: There were no section 32 meetings in the 2006-7 year, but two section 32 meetings have been held during the current year. The Court orders were made in 2005 in relation to the takeover of Oyster Bay Marlborough Vineyards Limited.
  3. From the Annual Report 2007: The Panel received 29 exemption applications and 56 independent adviser approval applications (granting all but 4). There were 23 takeover notices and the Panel reviewed all formal takeover documents.
  4. Paragraph (b) of the definition relates to recently de-listed companies. See paragraph 2, above, for the definition.
  5. See Table One (attached to the end of this paper) for the consequential changes to the TA required to change the 'specified company' nomenclature to 'code company'.
  6. Rule 2(3) states: 'The definition of code company in this rule specifies the period of time to be specified by the code for the purposes of the definition of code company in the Act.'