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

Proposal D: 50 or more shareholders - only holders of voting securities?

The issue
  1. The Panel has received an application for certain exemptions from the Code in regard to a finance company ("F"). The company's legal adviser accepted that F had become a Code company in 2002 when it issued non-voting redeemable preference shares which were taken up by approximately 200 shareholders. Prior to the issue there were (and still are) fewer than 20 shareholders holding ordinary shares in F. There are likely to be other companies that have issued non-voting shares (e.g., redeemable preference shares)9 to large numbers of shareholders but that have fewer than 50 shareholders that have voting rights in the company (i.e. ordinary shares). A brief review of prospectuses indicates that there may be somewhere in the order of 20 to 40 such companies.
  2. F's exemption application raised the issue of whether the 'code company' definition should be changed to exclude companies with less than 50 shareholders holding voting securities.
  3. F and other companies with similar circumstances must comply with the Code regardless of the fact that they have very few ordinary shareholders. The Panel cannot exempt such companies from being Code companies.

Alternative options

  1. The options are:
    1. Maintain the status quo (not preferred):
      This option means that companies with fewer than 50 shareholders holding ordinary shares, but with 50 or more shareholders when non-voting security-holders are counted, continue to be subject to the Code.
    2. Change the 'code company' definition to only include companies with 50 or more shareholders who hold securities that confer voting rights (preferred).

Analysis of preferred option

  1. In 2006 the definition of 'code company' was amended so that listed companies with only non-voting securities quoted on a registered exchange were no longer captured by the definition. No change was made in respect of the type of shareholdings for un-listed companies. The question was simply not addressed.
  2. The commentary to the Securities Legislation Bill in respect of the proposed amendment for listed companies, as reported from the Commerce Committee, stated:10

    The code governs bids to achieve controlling stakes in companies. It is thus concerned principally with control of voting rights. The code should not apply to companies that are party to a listing agreement only in respect of listed debt securities, equity warrants, or other non-voting interests. The change responds to submitters' concerns on this point.
  3. The Panel considers that these comments are equally applicable to companies whose equity securities are unlisted and whose non-voting interests effectively make them Code companies. The intention of the legislature was for the Code to govern control of voting rights. There is now an opportunity to address the issue by providing that non-voting securities are not included when counting shareholders for the '50 or more shareholders' definition.

Recommendation

  1. The Panel recommends that the 'code company' definition be amended by adding, in paragraph (c), after the words '50 or more shareholders', the words 'holding securities that confer voting rights', or words to that effect.

The overall recommendation

  1. Putting all the recommendations together, the Panel recommends:
    1. Renaming the TA definition of 'specified company' as 'code company'.
    2. Clarifying that a Code company remains subject to the Code until a transaction or event under the Code has concluded;
    3. Introducing a definition of 'shareholder' that is consistent with the definition in the Companies Act 1993; and
    4. Qualifying the non-listed company definition of Code company to only include companies with 50 or more shareholders holding securities that confer voting rights.
  2. As a result of proposals A, and D, the definition of 'code company' in the TA might look like this:

    Code company means a company that -
    1. is a party to a listing agreement with a registered exchange and has securities that confer voting rights quoted on the registered exchange's market; or
    2. Was within paragraph (a) at any time during the 12 months before any date or the occurrence of any event referred to in the Code; or
    3. has 50 or more shareholders holding securities that confer voting rights.

Proposal E: The section 8 issue

The Issue

  1. In the 2006 round of legislative amendments to securities and takeovers law that occurred under the Securities Legislation Bill, some small, consequential amendments to the TA were inadvertently missed, resulting in unintentional and inconsistent references in the TA. With the opportunity for legislative amendment, the Panel recommends these incorrect references be remedied.
  2. In section 8 of the TA there are three references to 'Part III'. The 2006 amendments made two relevant changes:
    1. The numbering of the TA's Parts was changed from Roman to Arabic numbers; Part III became Part 3; and
    2. As a matter of organising the TA under current Parliamentary Counsel Office drafting standards, Part III was divided into two Parts, with a new 'Part 4' introduced to separate miscellaneous powers (such as the Panel's exemption powers, and the TA's regulation-making powers) from the investigation and enforcement provisions in Part 3 of the TA.
  3. Thus the old Part III has now become Parts 3 and 4.
  4. Section 8 of the TA sets out the Panel's functions. It provides as follows:
"8 Functions of Panel
(1) The Panel has the following functions:

(a) To keep under review the law relating to takeovers of specified companies and to recommend to the Minister any changes to that law that it considers necessary:

(b) Repealed:

(c) For the purposes of paragraph a, to keep under review practices relating to takeovers of specified companies:

(d) To investigate any act or omission or practice for the purpose of exercising its powers and functions under Part III of this Act:

(e) To make determinations and orders and make applications to the Court in accordance with Part III of this Act:

(ea) To co-operate with any overseas regulator and, for that purpose (but without limiting this function), to communicate, or make arrangements for communicating, to that overseas regulator information obtained by the Panel in the performance of its functions and powers (whether or not confidential) that the Panel considers may assist that overseas regulator in the performance of its functions:

(f) To promote public understanding of the law and practice relating to takeovers:

(g) To perform such other functions as are conferred on it by this Act.

(2) In the exercise of its functions and powers under Part III of this Act and the takeovers code, the Panel shall comply with the principles of natural justice."
  1. It was not intended in the 2006 amendments that the application of section 8 of the TA be changed to exclude any of what was Part III and is now Parts 3 and 4. For example, the Panel's exemption power, now in Part 4 of the TA, is often exercised in conjunction with the Panel's enforcement powers to facilitate the remedying of breaches of the Code.
  2. The Panel believes that there may be a risk of challenge to its powers if a litigant were to argue that, by separating Part III into two new Parts and leaving the references in section 8 unchanged, Parliament intended to limit the Panel's functions in some way.
  3. The Panel does not consider this to be a significant threat; however, it is preferable to have consistency in the legislation and to ensure that mistakes are corrected.

Alternative options

  1. The options are:
    1. Maintain the status quo (not preferred):
      This would mean the inconsistency in section 8 remained.
    2. Replace references in section 8 to 'Part III' with Parts '3' and '4' (preferred).
      In particular, the reference to 'Part III' in -
      • section 8(1)(c) would be changed to 'Parts 3 and 4';
      • section 8(1)(d) would be changed to 'Part 3'; and
      • section 8(2) would be changed to 'Parts 3 and 4'.

Analysis of preferred option

  1. 'Part III' no longer exists in the TA. It is now restructured into two Parts, named 'Part 3' and 'Part 4'. Part 4, which contains the Panel's powers to grant exemptions, regulation-making powers and various savings and amendment provisions (most of which have been repealed) were formerly included in Part III.
  2. The Panel's function of granting exemptions has always been an integral part of the Panel's supervision and enforcement of the Code. The Panel should not be hampered from continuing to facilitate timely and commercially sensible resolutions to breaches of the Code by an accidental and artificial separation of its exemption function from its enforcement functions. That was never the intention of the 2006 amendments to the TA.
  3. Amending section 8 to change the references to 'Part III' to 'Parts 3 and 4' would remove the possibility of any argument as to the Panel's functions as they relate to the granting of exemptions.

Recommendation

  1. The Panel recommends that the references to 'Part III' in -
    • section 8(1)(c) be changed to 'Parts 3 and 4';
    • section 8(1)(d) be changed to 'Part 3'; and
    • section 8(2) be changed to 'Parts 3 and 4'.

Table One
Table of sections that require consequential amendments to change 'specified company' terminology to 'code company'.

Section

Title
2 Definition of securities
17 Annual fee in respect of funding of Panel
21 Matters to be considered by Minister in making recommendations concerning takeovers code
22 Specific provisions applying to takeovers code
23 Takeovers code not to apply in certain cases
33 Temporary restraining orders
33M When Court may make pecuniary penalty orders and declarations of contravention
33O What declarations of contravention must state
35 Persons who may apply
42 Court may require person to give evidence or produce documents relating to interests in securities
44B False or misleading statement or information
44V Persons entitled to appear before Court

Footnotes

  1. While it is recognised that instruments such as redeemable preference shares often have limited voting rights (such as the ability to vote on a proposal that affects the rights attached to the securities themselves), they are generally not considered to be 'voting securities' for the purposes of the Code and so the term 'non-voting' is used here to reflect the specific meaning given to 'voting securities' in the Code.
  2. At page 9