Page 4
| Code Word
December
2008
4.4
Costs imposed by the Panel under the Takeovers
(Fees) Regulations 2001 for enforcement action taken
under section 32 of the Takeovers Act 1993 are not
recoverable.
Category 2 (expenditure incurred for the purpose of
safeguarding the offerees' interests - including expenses
for countering propaganda)
4.5
The Panel considers that the category of expenses
identified by the Court in Canterbury Frozen Meat as
countering propaganda is an appropriate category, but
should be treated as a subset of the category defined as
safeguarding offerees' interests (which is an appropriate
category of expense to be recovered by a target).
Accordingly, the Panel treats Canterbury Frozen Meat's
Categories 2 and 3 as a combined Category 2.
4.6
The Panel notes that the Court in Canterbury Frozen
Meat suggested that share value might be a key measure
of offerees' interests. In the modern New Zealand
takeover environment the Code identifies the merits
of the bid as a key measure of offerees' interests, and
value as simply a subset of this, with its importance
varying depending on the nature of the relevant bid.
For example, in a partial bid, the consequences of the
bid both in terms of the control of the target company
and the effect on a shareholder's holding are of critical
importance.
4.7
The Panel considers that a broad view must be taken of
offerees' interests consistent with the Code's focus on
merits. This focus covers, in the Panel's view, any steps
taken in relation to matters such as:
- expenses incurred by directors in fulfilling their fiduciary responsibilities in a takeover to act in the interests of the shareholders;
- expenses incurred in ensuring that shareholders are properly informed; there being two aspects to this:
- the directors putting themselves in a position to be able to give advice to shareholders on the merits of the bid. It needs to be recognised that takeovers are rare events in the life of a company and, as such, directors commonly have no experience of takeovers and consequently little knowledge of how to respond to them. In order to respond properly they may need to retain an expert or experts versed in these matters (whether financial, legal, strategic or otherwise) to provide advice so that they are in a position to ensure that shareholders are properly informed.
- the communicating of received advice to shareholders, effectively and appropriately. Depending on the circumstances, this may give rise to the need to retain PR consultants and the need to provide that communication by way of public notices. However, there should be demonstrated a clear justification for employing these strategies in substitution for, or in addition to, direct communication with shareholders.
- expenses incurred in countering propaganda calculated to influence the offerees' choice are a part of seeing that shareholders are appropriately informed. The situation sometimes arises, particularly in hostile takeovers, where target company shareholders receive information from the bidder extolling the virtues of the bid and/or criticising the performance of the incumbent management and board. The target company must be able to respond to such information in a balanced and meaningful way and should be able to recover its costs in doing so. There should be clear justification for employing the use of PR consultants and/or public notices in substitution for, or in addition to, direct communication with shareholders.
Category 3 (Director reimbursement for expenses properly incurred in the interests of shareholders)
4.8
The Panel considers that this is an appropriate category. This category would include expenses incurred by the individual directors in relation to additional board attendances to consider the merits of the takeover and other takeover matters.
Reasonableness of expenses judged by existing circumstances
4.9
The Panel agrees with the Court's 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, as to what, in the light of events, proved to be strictly necessary.
Expenses for resisting a takeover bid
4.10
In
Canterbury Frozen Meat the Court took the view that expenses incurred for the purpose of resisting a takeover bid are not recoverable. In the Panel's view, a distinction needs to be made between:
- first, expenses incurred by the board of the target company in resisting a bid by engaging in defensive tactics which are not permitted by rule 38 of the Code. The Panel considers that these expenses are what the Court considered as being not properly incurred in Canterbury Frozen Meat. These expenses, which may include items such as the costs of sale of key assets, are not recoverable under rule 49(2); and
- second, expenses incurred by the board of the target company in resisting a takeover bid considered by the board not to be in the interests of shareholders of the target company. These expenses, mostly related to communications with shareholders, should be recoverable under Category 2 above, as they are incurred in trying to ensure that shareholders are fully informed when making a decision as to whether to accept or reject a takeover offer. There should be clear justification for employing the use of PR consultants and/or public notices in substitution for, or in addition to, direct communication with shareholders.