Expenses incurred in resisting a bid are not always easily identifiable as falling within either of these categories. Whether they are properly incurred will turn on an objective view of the reason why they were considered by the board to be necessary.

The Panel is aware that in the United States directors may have a fiduciary obligation to maximise value for shareholders when presented with a takeover offer, by seeking competing offers. In New Zealand there is no established law requiring directors to seek competing offers. However, target companies are able to seek competing offers if they wish to do so, provided they do not breach rule 38 of the Code, and must consider any such offers should they come forward.

The Panel considers that because the decision to seek a competing offer is a voluntary decision of the board and is not made pursuant to a legal or fiduciary obligation, the expenses in investigating or seeking competing offers are not recoverable under rule 49(2) as they do not properly fall within any of the above Categories of recoverable expenses.

The Panel suggests that if a target company board wishes to investigate or seek competing offers, then it should structure its adviser mandate in such a way that the expenses relating to the seeking of competing offers are clearly identifiable and separable from other expenses (i.e. expenses which may be recoverable under rule 49(2)).

For the purposes of rule 49(2) each competing offer should be viewed in isolation, to the effect that the offeror under the offer is only liable to pay the properly incurred expenses of the target company relating to that offeror's offer and not expenses incurred in relation to any competing offer.

Sometimes in a takeover transaction advisers' fees (usually financial adviser fees) are structured so that the adviser receives a larger fee if a certain result is achieved (e.g. a larger fee if the initial offer is increased).

The key role of advisers, in the context of the Code, is to assist the target company board in carrying out its duties under the Code by providing objective expert advice. By engaging the adviser it is expected that the board of the target company will receive the required advice, regardless of whether a "success" outcome has been achieved or not. Most commonly, the adviser is engaged to assist the board in deciding on the appropriate response in the face of the takeover. To specify a success fee outcome in advance of receiving the advice required by the board to determine the target's response suggests in itself that the fee is not properly incurred for the purposes of rule 49(2). Whether or not this might be the case, as the adviser is expected to provide the target company board with appropriate objective advice in any event, any "success" component of the fee must relate to an outcome that is not of itself an outcome that must be achieved as a legal or fiduciary obligation of the directors of the target company under Category 1.

For these reasons, the Panel takes the view that while the target company may have sound commercial reasons for entering into a "success fee" arrangement with the adviser, it is difficult to envisage the circumstances in which the costs incurred under such an arrangement could be regarded as being properly incurred and therefore recoverable under rule 49(2). However, that does not necessarily rule out success fees from being recoverable under rule 49(2) in appropriate circumstances.

Target companies may consider making payments to shareholders to encourage them not to accept a particular takeover offer.

The Panel has seen no examples of direct inducement payments. The Panel considers that if they were to occur the costs of any such payments would not be recoverable under rule 49(2) of the Code as they do not properly fall within any of the above Categories of recoverable expenses.