The Panel considered that because the parcels of shares and bonds were inseparable there was effectively only one class of security holder i.e. holders of parcels of shares and mortgage bonds. No shareholder would, in effect, hold a different class of securities from other shareholders. Also, because security holders could not sell only their shares or only their bonds, the shares and bonds did not have a value independent of the parcel of which they were part.

In these circumstances the Panel considered that a rule 22 report on fairness between the shares and the bonds would have no meaning, and that an exemption from rule 22 was appropriate.

However, the Panel is unlikely to consider that there is, in effect, only one class of voting securities merely because two different classes of securities that are quite similar in nature, with only minor differences, are regarded by the market (based on price) as being virtually the same.

If the Panel were to grant an exemption from rule 22 in these circumstances it would, in effect, be certifying that the differences between the classes of security had no effect on the value of the securities. The Panel is not in a position to do this.

Even in circumstances where the securities are substantially similar a rule 22 report gives useful information for shareholders. For example, in the recent offer by Rubicon Forests Limited for Tenon Limited, Tenon had two types of share on issue, ordinary shares and preference shares. Both classes of share carried identical voting rights but one class had a temporary preferential status upon liquidation. Although the two classes of shares had recently traded at the same price, it was not certain that this would always be the case. The rule 22 report told shareholders that, in the opinion of the independent adviser, the (identical) consideration offered by Rubicon for each type of share was fair and reasonable as between the two classes of shares.

Another circumstance would be where identical securities were on issue, but some were held by employee shareholders subject to loan obligations back to the company, or on a partly paid-up basis. A rule 22 report is likely to be required in such circumstances.

Offerors considering applying for an exemption from rule 22 should first consider whether the Panel would be likely to be satisfied that, in respect of the relevant code company:

• all shareholders hold the same rights; and
• there was no possibility that holders of different securities could get a different value for their securities, or be entitled to different treatment or be subject to different constraints on their ability to sell their securities.

In these circumstances the Panel would be likely to consider that there is, in effect, only one class of voting securities.

Recent Issues

PANEL CONSIDERS ALLEGATIONS OF DEFENSIVE TACTICS

The Panel recently considered an allegation of defensive tactics made by Rubicon Limited in relation to the actions, or inactions, of the directors of Tenon Limited in response to Rubicon’s (successful) partial offer.

The Panel’s determination of the complaint found that Tenon’s directors had not contravened the Code’s prohibition on defensive tactics. The matter highlighted several aspects of the interpretation of rule 38 of the Code, including:

• that “an action” by the directors of a company can include a decision to not act;
• that an action “in relation to the affairs of a Code company” contemplates interference with the ongoing undertaking of a company’s business. This might include selling assets, issuing further shares, declaring an extraordinary dividend or such other initiatives that alter the nature and extent of the business the offeror has taken into account in making the offer. However the scope of the phrase does not extend to a refusal to respond to a requirement that an offeror purports to make under the terms of its offer.

Two of the conditions of Rubicon’s partial offer purported to impose obligations on Tenon’s directors to provide information about aspects of its affairs to Rubicon, or to an expert appointed by Rubicon.

These conditions were “change of control” conditions to address the risk that in the event of a change of control of Tenon:

• no shares, notes options or other securities held or controlled by Tenon would be forfeited, transferred or subject to any right of pre-emption that could have a material adverse impact on the Tenon group’s financial position;
• Tenon’s interests in any concession, lease, grant, permit, license, franchise, timber cutting, farming, mining or growing right etc would not be materially and prejudicially affected.

The conditions required Tenon’s directors to confirm to Rubicon no later than 7 days after the date of the offer that no such adverse outcomes could occur, or, if the directors of Tenon failed to so confirm, that an expert appointed by, but not an associate of, Rubicon would provide the confirmation sought.

Tenon’s directors declined to provide the confirmations sought. In a public release, Tenon told shareholders that it did not intend to provide information to an expert to enable the expert to confirm that the defined adverse consequences would not arise from a change of control of Tenon.

Rubicon alleged that the decision by Tenon’s directors not to assist Rubicon by satisfying the terms of two important conditions of its offer amounted to an action designed to frustrate its offer. Rubicon claimed that this contravened rule 38 of the Code.