Page 7
| Code Word
December
2008
5.2
Drawing on the principles enunciated in the
Canterbury Frozen Meat case, but having regard to the Code itself and the environment in which modern takeovers occur, the Panel considers that before an item of expense can be allowed under rule 49(2) of the Code, the target company must prove that the following four elements have been satisfied:
(1) Application of general principles of proper expenditure - that the expenditure falls under one of the following three categories:
- Category 1 - Expenditure incurred in:
- complying with the procedural requirements of the Code;
- complying with the law and directors' fiduciary obligations which touch on the target company's response to a takeover.
- Category 2 - Expenditure incurred for the purpose
of safeguarding the offerees' interests. Consistent
with the law as set out in the Takeovers Code, the
merits of a bid (with value representing a subset
thereof) should be used as a key measure of the
offerees' interests. This Category also includes
expenditure incurred in countering propaganda
(which was treated as falling under a separate
additional Category in Canterbury Frozen Meat).
- Category 3 - 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 offer or
takeover notice.
(2) Nature of expense reasonable - that it was
reasonable (with reference to circumstances existing
when the expense was incurred) to incur the expense
by engaging in that kind of activity;
(3) Quantum of expense reasonable - that it was reasonable (with reference to circumstances existing when the expense was incurred) to spend that amount on that kind of activity; and
(4) Nexus with takeover - that there is a sufficient nexus between the incurring of the expenditure and the offer or the takeover notice.
5.3
Whether 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 are properly incurred will turn on an objective view of the reason why they were considered by the board to be necessary. If those expenses were incurred by engaging in defensive tactics which are not permitted by rule 38 of the Code they will clearly not be properly incurred.
5.4
Expenses incurred by the board of the target company in investigating or seeking competing offers are not recoverable under rule 49(2), as they do not properly fall within any of the three Categories of recoverable expenses.
5.5
The Panel takes the view that it is difficult to envisage the circumstances in which "success fees" could be regarded as being properly incurred and therefore recoverable under rule 49(2).
5.6
Direct and indirect inducement payments intended or likely to influence shareholders to either reject a takeover offer or vote against such an offer are not recoverable expenses for the purposes of rule 49(2).
5.7
Directors' remuneration for additional attendances may be a recoverable expense under rule 49(2). Whether such remuneration expense will be recoverable must be determined on a case by case basis in the light of the relevant facts.
Erratum - Kerifresh transactions
In the last issue of Code Word (No. 23) the article on the Kerifresh matter made various references to Graham Cowley's involvement in transactions by GMS Fulfilment NZ Limited that the Panel found did not comply with the Code.
The article incorrectly stated that Graham Cowley had "suggested" a solution to issues surrounding the unwinding of the "warehousing" arrangement. While the Panel found that the transactions leading to the unwinding of the warehousing arrangements involved Alan Thompson, Hamish McHardy and Graham Cowley, it made no finding as to who had suggested the particular form of transaction.
The article also incorrectly stated that McHardy, Thompson and Cowley had "... agreed to unwind the warehousing agreement ..." by a series of transactions using Cowley's company, GMS, to hold Kerifresh shares. While McHardy and Thompson said in evidence to the Panel that this was the purpose of the transactions, and the Panel had so found, Cowley had said in evidence that the transactions had been entered into for a different purpose unrelated to any warehousing agreement.
The Panel regrets any embarrassment which may have been caused to Mr Cowley for any inaccuracy in its Code Word article.