granted are designed to preserve the underlying purpose and intent of the relevant provisions of the Code.
The class exemptions contained in the Takeovers Code (Class Exemptions) Notice (No.2) 2001 demonstrate the types of situations that the Panel’s exemption power is intended to address. For example a shareholder that increases its level of voting control above 20% in a code company as a result of a buyback by a company of its own shares cannot do so in compliance with the Code because the Code provides no appropriate mechanism. The Panel granted a class exemption from the fundamental rule to address this situation. The conditions of that exemption ensure that the underlying purpose and intent of the provisions of the Code are preserved by requiring either that the relevant shareholder sell down its interest within a specified time or shareholders of the code company give their prior approval to the maximum potential increase in voting control that could result from the buyback.
A review of the various specific exemptions granted by the Panel will show the same approach in a range of different circumstances where the exemption deals with compliance difficulties subject to conditions based on the objectives of the Code.
The Panel has also issued policy statements from time to time to deal with special cases. For example the Panel has issued a policy statement dealing with schemes of arrangement. A scheme of arrangement is a procedure under the Companies Act 1993 to facilitate mergers. However, the subsequent enactment of the Takeovers Act and the Code has meant that mergers by way of schemes of arrangement are unlikely to be possible without the assistance of some form of exemption from the Code. The Panel has been unwilling to see the statutory scheme of arrangement procedure for mergers rendered ineffective by the Code. Consequently, the Panel’s policy is aimed at permitting mergers by way of schemes of arrangement in limited circumstances and subject to certain conditions which provide a balance between the objectives of both pieces of legislation.
The Panel has also used its exemption power to assist in the rectification of breaches of the Code where this is appropriate in the interests of all parties to a takeover transaction. An example of such a use of the exemption power was the exemption from the compulsory acquisition provisions of the Code granted to SK Foods International in relation to its takeover offer for Cedenco Foods Limited. SK Foods had failed to comply strictly with certain rules of the Code in seeking to enforce its compulsory acquisition rights and consequently was in breach of the Code. The Panel took the view that it was in the interests of all parties to allow the compulsory acquisition to proceed by way of exemption but subject to conditions which ensured that the policy and intent of the Code in relation to the compulsory acquisition procedure was fulfilled.
Against this background of the nature of the Panel's exemption power we discuss below recent applications made to the Panel for exemptions in respect of upstream acquisitions, differential offers, scrip offers and offers for convertible securities.
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Upstream acquisitions
The Code was deliberately constructed to capture the acquisition of voting rights in code companies by means of a transaction upstream from the direct holder of voting rights in the code company. Compliance with rule 7(c), which requires the approval of shareholders given at a meeting of the code company held in compliance with the requirements of the Code, is the appropriate mechanism to be utilised in respect of such upstream acquisitions. Exemptions have been sought as an alternative to this procedure. The Panel's attitude to exemptions for upstream acquisitions can be demonstrated by a discussion of a recent exemption application made by Vector Limited.
In October 2004 Vector advised the Panel that it wished to acquire control of 64.25% of the voting rights in NGC Holdings Limited which were held by a New Zealand holding company of The Australian Gas Light Company (AGL). The Code provides two alternatives which Vector could utilise to acquire control of these voting rights:
- a full takeover offer for NGC which AGL could ensure was accepted by its holding company; or
- approval by shareholders under rule 7(c) to a transaction which would result in Vector acquiring the AGL subsidiary which held the NGC shares.
The direct takeover alternative had taxation disadvantages for AGL and AGL did not wish to go through the shareholder approval process under rule 7(c).
Vector sought an exemption from rule 6(1) of the Code to enable it to become the controller of the 64.25% of the voting rights in NGC by acquiring AGL’s New Zealand holding company directly on the basis that it would also make a takeover offer for the remaining shares in NGC for the same consideration per share that was used in calculating the price for the AGL holding company.
Vector and AGL could have utilised the mechanisms which the Code provided. Instead they proposed to structure the transaction in a way that did not comply with the Code to provide taxation benefits and commercial convenience to AGL. This is not a proper ground for the exercise of the Panel's exemption power.
Vector had argued that there was a precedent for the exemption which it sought. They argued that the Panel had previously granted an exemption to Origin Energy New Zealand Limited to allow the acquisition of control over more than 50% of the voting rights in Contact Energy Limited, a code company, by means of the acquisition of a New Zealand holding company from its parent Edison Mission Energy.
The facts of the Origin Energy exemption were entirely different from those of the Vector application. The circumstances of the Origin Energy application were unique in that loss of complex upstream financing arrangements could have resulted in a negative pricing effect for all Contact shareholders if the sale of
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