1.6
The Panel recognises that a proper balance must be
maintained between ensuring that target companies and
their shareholders on the one hand are not financially
disadvantaged by unmeritorious takeover offers, and
on the other hand are not denied the opportunity to
consider meritorious bids by reason of the concern of
bidders at the potential cost if their bid is made (whether
successful or not).
1.7
In considering this balance, the Panel reached the
view that to restrict the recovery of costs effectively
to expenses related to notices and target company
statement obligations would not address this balance
properly in the modern New Zealand takeover
environment. Specifically, the Panel considered that to
restrict the recovery of expenses in this way would not
only be inconsistent with Canterbury Frozen Meat but,
more importantly, would be inconsistent with the Panel's
intentions in drafting rule 49(2) into the Code.
1.8
In publishing this guidance note, the Panel wishes to
assist market participants in identifying what costs are
properly incurred in terms of rule 49(2). Section 2 of
the note discusses Canterbury Frozen Meat.
Section 3 highlights the demands made of target
companies and their Boards in the current takeovers
environment. Section 4 considers how the expenses
arising from these demands should be categorised in
terms of the general categories recognised by the Court
in Canterbury Frozen Meat.
1.9
As the regulator responsible for enforcing the Code, the Panel has jurisdiction to determine compliance with the Code, including compliance with rule 49(2). The Panel stands willing to exercise its jurisdiction in appropriate circumstances.
2.
Canterbury Frozen Meat
2.1
In
Canterbury Frozen Meat the Court was of the view that before an item of expense can be allowed the target company must prove:
- that the expense comes under one of the following four
categories:
Category 1 - Expenditure incurred in and incidental
to the fulfilment of the target company's obligations
in respect of notices, the target company statement
and related out of pocket expenses;
Category 2 - Expenditure incurred in countering propaganda by the offeror which is calculated to influence the offerees' choice;
- Category 3 - Expenditure incurred otherwise for
the purpose of safeguarding the offerees' interests
in relation to the takeover scheme, for instance, in
keeping offerees informed of developments which
might affect the value of their shares;
Category 4 - Expenditure incurred in reimbursing
directors for expenses properly incurred on behalf
of, and in the interests of, the shareholders of the
target company in relation to the takeover scheme;
and
- that it was reasonable to incur the expense by
engaging in that kind of activity;
and
- that it was reasonable to spend that amount on that
kind of activity.
2.2
The Court was also of the view that:
- in examining any particular item of expenditure, reasonableness should be judged with reference to circumstances existing when the expense was incurred and not with the benefit of hindsight to what, in the light of events, may have proved to be strictly necessary;
- expenses incurred for the purpose of resisting a takeover bid are not recoverable.1
3.
Changes in the corporate landscape
3.1
The market environment in which takeovers now take place is significantly different from, and more complex than, that which existed in 1972, when
Canterbury Frozen Meat was decided. The changes include:
- significant changes in the law - principally reflected in a greater overall compliance requirement.
For example, compliance with:
- Securities Act 1978
- Securities Markets Act 1988 (substantial security holder disclosure, directors' and officers' disclosure, insider conduct and market manipulation prohibitions)
- NZX listing rules
- Takeovers Act 1993 and Code and the establishment of the Panel as the expert body regulating takeovers
- continuous disclosure requirements, requiring (in certain circumstances) a listed target company to take ongoing action;
- See page 4 Expenses for resisting a takeover bid.