relationship, or an ownership relationship such that they should, under the circumstances, be regarded as associates; or

(e)

the first person is an associate of a third person who is an associate of the other person (in both cases under any of paragraphs (a) to (d)) and the nature of the relationships between the first person, the third person, and the other person (or any of them) is such that, under the circumstances, the first person should be regarded as an associate of the other person.

The Panel considered a number of factors, including:

• the historical business relationship through companies in which both the Rutherfords and Mr Gould had an involvement;
• the Rutherfords had previously contracted Mr Gould to manage certain investments in ASL on their behalf;
• the Rutherford investment in GHL was very informal with minimum documentation and was characterised by a high degree of trust on the part of the Rutherford family;
• the Rutherford family agreed not to take part in the governance of GHL; and
• the relevant investment monies of the Rutherfords were kept together over many years, and they adopted a common approach to the investment in GHL.

The Panel was satisfied that the strands of all three elements (business, personal and ownership relationships) of the extended definition of “associate” in rule 4(1)(d) satisfied the requirements for association between Mr Gould and the Rutherford family. The rule 4(1)(d) relationships did not need to exhibit any agreement over control or any particular form of undertaking relating to the voting rights attached to shareholdings in the company. In particular, the expression “in the circumstances” enabled all factors to be considered in assessing the relationship, taking into account the importance of the associate status.

The Panel determined that the associate status crystallized on 11 September 2002 and that consequently all acquisitions of DTL securities by Rutherford family members after that date were in breach of rule 6(1)(a). The parties at fault were required to divest those holdings that had been acquired in breach of the Code.

The family members gave enforceable undertakings that the relevant shares would be sold within six months of the Panel’s decision and subsequently confirmed that this had been done.

Even small acquisitions of voting rights in a Code company can be in breach of the Code if an associate of the person acquiring the voting rights already holds more than 20% of the voting rights in the company. The provision is designed to ensure that controlling shareholders cannot increase their level of control in a Code company through associates when they would be unable to acquire the additional voting rights themselves.

Initial Public Offering

EXEMPTION FOR JADE SOFTWARE CORPORATION LIMITED

The IPO class exemption (clause 7, Takeovers Code (Class Exemptions) Notice (No 2) 2001) relates to voting rights obtained through initial public offerings by newly listed companies

It provides exemptions from the fundamental rule (rule 6(1)) for increased control percentages arising from allotments of shares that occur within six months of the IPO. A condition of the exemption is that the offer complies with the Securities Act and that the potential control outcomes are clearly stated in the prospectus and investment statement.

During 2002 Jade Software Corporation Limited (Jade) was developing an IPO involving the issue of shares in what would become a Code company. Certain bonus share allotments that could be made after the IPO could not comply with the Panel’s IPO class exemption because they could occur up to eight years after the initial share issue. Jade sought a specific exemption from the Panel from the fundamental rule.

The bonus share allotments would arise from the issue of a separate outperformance share (OPS) for the benefit of shareholders who were listed on Jade’s register as at 14 December 2001. These allotments could be made in three separate tranches over eight years, depending on Jade reaching certain specified profitability targets.

Specific allotments under the OPS could probably have been approved by non-associated shareholders under rule 7(d) of the Code at the time they were to be made. However, this would have defeated their purpose and exposed the original OPS shareholders to the risk that non-associated shareholders of Jade, although they knew about the OPS when they acquired Jade shares, may decline to approve the allotments.

Jade’s situation was similar to the situation envisaged by the IPO class exemption. The basic premise of the IPO exemption is that subscribers are, by making the decision to subscribe, implicitly approving the control outcome set out in the offer document. The exemption sought by Jade was granted subject to conditions, including that:

• any investment statement and prospectus for the IPO includes a summary of the terms of the OPS which clearly explains the terms of the bonus issues, and the dilutionary effects if one or more of the bonus issues were triggered;
• Jade’s annual report in each year the OPS is on issue includes a summary of the terms of the OPS and how these affect shareholders; and
• the key terms and conditions of the OPS could not be altered.

Although shareholders could not vote to approve the allotment of the bonus shares under the OPS at the date of allotment (which might otherwise have occurred under rule 7(d) of the Code) those shareholders would have accepted the OPS and its terms and conditions by deciding to invest in Jade either through the IPO or at a later time.

Recent announcements from Jade indicate that the IPO is unlikely to proceed.