Underwriting

GUINNESS PEAT GROUP PLC – TOWER LIMITED EXEMPTION

In July 2003 Tower Limited (Tower), a Code company, was undertaking a recapitalisation through making a large pro rata rights offer to existing shareholders. Guinness Peat Group plc (GPG), already Tower’s largest single shareholder, entered into an agreement with Tower to underwrite the offer. GPG and Tower also agreed, in part to comply with decisions of the NZX’s Market Surveillance Panel, to appoint a panel of sub-underwriters.

GPG had the potential, albeit reasonably remote, to obtain in excess of 20% of the voting rights in Tower as a consequence of its underwriting of Tower’s rights issue. If this occurred, GPG intended to rely on the class exemption for underwriters set out in clause 19 of the Takeovers Code (Class Exemptions) Notice (No 2) 2001(the underwriter’s class exemption). That exemption provides that:

19(1)Every person who is, or is an upstream party of, an underwriter is exempted from rule 6(1) of the Code in respect of any increase in the person’s voting control.

(2)

The exemption is subject to the condition that—

(a)

the increase in the person’s voting control results only from the allotment or transfer to the underwriter of voting securities in a Code company under a bona fide underwriting or subunderwriting contract entered into in the underwriter’s ordinary course of business; and

(b)

the control percentage of the person is decreased within 6 months after the increase in the person’s voting control to, or below, either—

(i)

the control percentage of the person immediately before the increase in the person’s voting control; or

(ii)

if—

(A)…; or

(B)

the aggregate of the control percentages of the person and the person’s associates immediately before the increase was less than 20%, 20% less the aggregate of the control percentages of the person’s associates at the time of the decrease; and

(c) the additional voting rights of the person are not exercised before the decrease.

An underwriter is defined in the exemption as:

a person whose ordinary business includes entering into bona fide underwriting or subunderwriting contracts with respect to offers of securities.

The Panel’s preliminary view was that GPG would be unable to rely on that class exemption because GPG’s ordinary business did not include “entering into bona fide underwriting or sub-underwriting contracts with respect to offers of equity securities”. GPG did not accept that it was unable to rely on the class exemption.

As an alternative to purporting to rely on the class exemption GPG, at the invitation of the Panel, applied for a specific exemption from the fundamental rule to enable the underwriting agreement to proceed.

The exemption was granted subject to the conditions that-

• the aggregate control percentage of GPG and Ithaca (its subsidiary) was decreased to, or below, 20% within the period that ended with the earlier of-

  (i)

  the day that was 30 days from the date on which GPG and Ithaca increase their voting control under the agreement; and

  (ii)

  the day that Tower held its next general meeting; and

• the voting rights attached to the voting securities that must be disposed of are not exercised by GPG or Ithaca.

These conditions were tighter than those contained in the underwriter’s class exemption and were intended to ensure that GPG, which had demonstrated its desire to increase its control in Tower, had a relatively brief period in which to dispose of any shares it obtained above the 20% Code threshold.

GPG notified the NZX that, after having fulfilled its underwriting obligations, it had acquired only 17.1% of the total voting securities of Tower. Consequently the exemption was not required and was revoked.

The policy behind the underwriters class exemption was to provide professional underwriters with a reasonably generous period in which to sell down shareholdings in excess of 20% obtained through fulfilment of their underwriting obligations. It was not intended to extend the benefit of the underwriters class exemption to parties who used underwriting arrangements as a means of increasing their control of target companies.

The Panel is reviewing its underwriters class exemption notice to ensure the wording of the exemption reflects the Panel’s policy intentions.

Defensive Tactics

TOLL GROUP (NZ) LIMITED AND TRANZ RAIL HOLDINGS LIMITED

The Panel dealt with two issues involving alleged or possible defensive tactics being used by the directors of Tranz Rail Holdings Limited (Tranz Rail).

The first concerned the agreement between the Crown and Toll Group (NZ) Limited/Toll Holdings Limited (Toll) relating to the sale of the rail network to the Crown once Toll obtained control of Tranz Rail. The Panel received a complaint that this action amounted to a defensive action by the “directors” of Tranz Rail.

The second concerned Tranz Rail’s wish to sell the Wellington Railway Station to the Crown during the course of Toll’s takeover offer for Tranz Rail. Tranz Rail sought the approval of the Panel to the proposed sale.

Rules 38 and 39 of the Code deal with defensive tactics by the directors of a target company. Rule 38 aims to ensure that directors of Code companies do not take action which could, once notice of an offer has been given or an offer is believed to be imminent, effectively frustrate that offer. Rule 39 specifies the circumstances in which the directors of a Code company can take defensive actions.

On 7 July 2003 the Crown and Toll entered into an agreement which provided that, if a takeover offer to be made by Toll in July became unconditional: