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Proposal B: Start with the Code, finish with the Code

The issue

20. Under rule 6(1)(a) of the Code, a person may not increase their percentage of voting rights 'in a code company' unless, after that event, they hold or control (together with their associates) not more than 20% of the voting rights 'in the code company'. This fundamental rule of the Code relies on the definition of Code company in the TA's and the Code's definition provisions. The company in respect of which the increase occurs must therefore either be listed, de-listed within the last 12 months, or have 50 or more shareholders in order to be a Code company and be subject to the fundamental rule.
21. The question has been raised as to whether the Code still applies if a company no longer meets the Code company definition of '50 or more shareholders' midway through a Code regulated transaction or event. This could happen where the number of shareholders which have not accepted an offer is less than 50 and the offer is unconditional (i.e. the bidder has been able to take up the acceptances that have been given). Alternatively, or in conjunction with the former, sufficient of the remaining shareholders of the target company may have sold their shares to another acquirer, so that the number of shareholders dropped below 50, but not directly as a result of the takeover.
22. If the Code no longer applied, the shareholders would lose their Code protections and the Panel would lose its powers to intervene and supervise the takeover. Although the takeover would proceed based on the underlying contract created by the offer documents, the provisions in the Code not replicated in the offer documents, and the Panel's supervisory and enforcement role, would be gone.
23. The problem is perhaps even worse in relation to Part 7 of the Code which mandates the requirements in relation to compulsory acquisition. Part 7 deals with the situation where a shareholder becomes a 'dominant owner'. Rule 50 sets out the definitions for Part 7, including that a 'dominant owner, in relation to a code company', means a person who becomes the holder or controller of 90% or more of the voting rights 'in a code company'.
24. Part 7 requires the dominant owner to elect whether to compulsorily acquire all the outstanding securities or to adopt a 'voluntary sale' under which the outstanding security holders have the right to sell their shares in the company to the dominant owner (and the dominant owner must purchase the shares of any outstanding security holder that exercises that right within a defined period of time).
25. If a person becomes a dominant owner of an unlisted company as the result of, say, a full takeover offer and by the time the offer closed there were less than 50 shareholders left in the company, the person might want to argue that they were not a 'dominant owner' as defined by rule 50. They would argue that the company was not a 'code company' because it did not have 50 or more shareholders. Therefore the person was not a dominant owner 'in relation to a code company'. This argument might be tried in a situation where the market had fallen sharply during the course of the takeover and the company was no longer so attractive to the bidder at the price paid. The Code's pricing rules for compulsory acquisition could well leave the bidder in a position where the same consideration had to be paid for the outstanding securities that are subject to the compulsory acquisition rules as had been paid under the takeover. Even if the bidder elected a voluntary sale (so it only had to acquire the shares of any outstanding security holder who wanted to sell) instead of a compulsory acquisition (which leaves the outstanding security holders with no choice - their shares will be taken by the dominant owner), the consideration would now be so advantageous to the outstanding security holders that they may all want to take up the voluntary sale.
26. Another possible scenario is where a bidder makes a full offer at a low price for an unlisted company, because it really only wants to acquire a relatively small parcel of shares - say, to take it from 48% to over 50%. During the course of the offer period the market falls significantly and the offer is accepted by so many shareholders that the bidder ends up with 90% of the all the company's shares, but there are less than 50 outstanding security holders left after the offer closes. The bidder does not want to have to acquire any more shares so argues that it is not a dominant owner because the company is no longer a Code company.
27. The argument might also be tried by an outstanding security holder that does not want to be compulsorily acquired. The definitions in rule 50 for outstanding securities and outstanding security holders are also pegged to the securities 'in the code company'.
28. It has been asserted that the Code could be interpreted as ceasing to apply as a result of achieving dominant ownership of the Code company, on the basis that there were no longer 50 shareholders. Several enquiries have also been made about this issue.
29. Although the problem is not considered to be large (in that the Panel has so far managed the issue with the co-operation of the parties), the disruption that would be caused by, for example, having to resolve the issue through the Court, and dealing with the potential information flows, during the Code's intense time frames, could be very great indeed to the shareholders, the bidder and the Panel.
30. The problem, therefore, is one of uncertainty.

Alternative options

31. The options are:
    1. Maintain the status quo (not preferred):
       This would not resolve the current uncertainty. If it is not clear in the legislation that transactions begun under the Code must proceed to their completion under the Code, the provisions in the Code may be argued to not apply.
    2. Add a clarifying provision to the TA (preferred).
       Under the preferred option the definition of 'code company' would be amended to clarify that a company remains a Code company for the duration of any Code regulated transaction or event (including for a subsequent compulsory acquisition resulting from a takeover or other Code-regulated transaction or event).

Analysis of preferred option

32. Amending the TA to clarify that a Code company remains a Code company throughout any Code regulated transaction or event ensures clarity and removes any possibility of raising the argument that the Code ceases to apply mid-transaction.
33. Although a purposive reading of the Code suggests that the Code should continue to apply throughout a takeover offer (and into compulsory acquisition if the bidder becomes a dominant owner as a result of the takeover), the Panel considers that a legislative change to clarify the Code's application is desirable. It would impose no costs or disadvantages, as it would merely clarify the current intended application of the law.

Recommendation

34. The Panel recommends a legislative change to clarify that a company remains a Code company for the duration of any Code regulated transaction or event (including for a subsequent compulsory acquisition resulting from a takeover or other Code-regulated transaction or event).