This guidance note sets out the Panel's policy for dealing with the impacts of the Takeovers Code on upstream acquisitions. To keep the policy manageable, this guidance note deals with a "base case" scenario where 100% control of the upstream target entity is acquired. Of course, every case that comes before the Panel will need to be considered on its own merits and circumstances.
What is an upstream acquisition?
1.
An upstream acquisition is an acquisition that occurs in New Zealand or overseas, that results in the acquirer of the upstream target becoming a controller of voting rights in a downstream New Zealand Code company.
1 This acquisition of control occurs because the upstream target holds or controls voting rights in that downstream Code company and that asset (i.e., the voting rights) is acquired as part of the acquisition of the upstream target entity.
2.
The acquisition of control of a downstream Code company may be incidental to the acquirer's purpose of acquiring the upstream target. However, the acquisition of an upstream entity can also be effected for the purpose of indirectly acquiring control of an interest in the downstream Code company.
Application of the Code
3.
In an upstream acquisition, if the upstream target entity holds or controls more than 20% of the total voting rights in a New Zealand Code company, the upstream acquirer may also become the effective controller of the voting rights in the downstream Code company and must comply with the Code in respect of that downstream acquisition.
4.
The question of whether an upstream acquisition results in an acquirer becoming an effective controller of voting rights in a downstream Code company is not always certain. There are clear cases where effective control over the downstream parcel will be achieved (for example, the takeover succeeds and the upstream acquirer obtains 100% control of the upstream entity).
5.
The Panel assumes that any acquisition of more than 50% of the voting rights of an upstream target would result in the upstream acquirer obtaining effective control over the downstream Code company. However, an acquirer may be able to establish that the Panel's assumption about obtaining control would not apply to its specific circumstances. If the upstream acquirer acquires 50% or less of the voting rights of the upstream target, the extent to which it will gain control of the downstream Code company, and therefore be subject to the Code, will depend on the circumstances.
Prior shareholder approval or prior takeover offer
6.
In order to comply with the Code,
before the upstream acquirer gains control of the upstream target (and therefore of the target's voting rights in the downstream Code company), the acquirer must have either:
(a)
obtained approval for the upstream acquisition by the downstream Code company's shareholders by way of ordinary resolution under rule 7(c) of the Code; or
(b)
completed a takeover of the downstream Code company under rule 7(a) of the Code.
7.
Where the upstream acquirer made a takeover offer for the downstream Code company, it would need to do so contemporaneously with, or in advance of, its acquisition of the upstream target. It would, in order to comply with the Code, need to have included in the upstream takeover offer appropriate conditions to ensure that it did not gain control of the upstream target, and, therefore, of the upstream target's stake in the downstream Code company, until the takeover offer for the downstream Code company succeeded. Likewise, downstream shareholder approval of the upstream acquisition, under rule 7(c) of the Code, would have to have been completed before the upstream acquisition became unconditional.
8.
Both these compliance options are impracticable, if not impossible, in some cases. The alternative to complying with the Code's requirements is to obtain an exemption from those requirements. The Panel has decided to give guidance to the market as to how it would exercise its discretion to grant exemptions in such circumstances.
Application for exemption
9.
The Panel will consider applications for exemptions
from the Code in relation to upstream acquisitions
on a case by case basis.
10.
The exemption process is set out below and illustrated in the diagram at the end of this guidance note. The purpose of this guidance note is to set out the Panel's general policy in respect of upstream acquisitions. It does not attempt to address every possible scenario that might occur. Accordingly, this guidance note sets out the "base-case".
Unconditional exemption
11.
The Panel will normally grant an unconditional exemption from rule 6(1) of the Code for an upstream acquirer, where the upstream acquisition would result in the upstream acquirer becoming the controller of more than 20% of the total voting rights in a downstream Code company, if:
(a)
the upstream target is listed on a "recognised exchange" (as described below); and
(b)
acquiring control of the voting rights in the downstream Code company would not reasonably be regarded as a significant purpose of the upstream acquisition ("purpose test").
12.
If the value of the interest held by the upstream target
in the downstream Code company is less than 25% of
the enterprise value of the upstream target (or such other
valuation methodology that the Panel considers may
be appropriate in the circumstances),
2 the purpose test
will be prima facie satisfied ("value test"). However, the
value test is only a proxy for purpose, and if the Panel
considers that a significant purpose of the upstream
acquisition is to acquire control of the downstream
Code company voting rights, the meeting of the value
test will be disregarded.
3 Where the interest held by the
upstream target in the downstream Code company is
more than 25% of the enterprise value of the upstream
target, it is possible that the meeting of the value test
may be disregarded if the Panel is satisfied that it is not
a significant purpose of the acquisition to acquire the
downstream Code company.
13.
"Recognised exchanges" are New Zealand Exchange
Limited and foreign exchanges in jurisdictions with
a comparable level of investor protection to New
Zealand. The Panel has identified the following foreign
exchanges to be "recognised exchanges": the Australian
Securities Exchange, the American Stock Exchange
LLC, Deutsche Börse AG, Euronext Amsterdam
NV, Euronext Paris SA, Italian Exchange SpA, JSE
Securities Exchange South Africa, Kuala Lumpur
Stock Exchange, London Stock Exchange plc,
The NASDAQ Stock Market Inc, New York
Stock Exchange Inc, Singapore Exchange Limited,
The Stock Exchange of Hong Kong Limited,
Swiss Stock Exchange, Tokyo Stock Exchange,
The Toronto Stock Exchange Inc.
Conditional exemption
14.
If the purpose test is not satisfied or the upstream
acquisition is of a target that is not listed on a recognised
exchange, the Panel will most likely not grant an
unconditional exemption.
15.
H owever, the Panel will normally grant a conditional
exemption in these circumstances. The exemption would
be subject to the condition that the upstream acquirer
elects, and undertakes, one of the following compliance
options, to either:
(a)
decrease the upstream target's holding or control of
securities carrying voting rights in the downstream
Code company to 20% or less by no later than six
months after the upstream acquisition becomes
unconditional, and ensure that pending the decrease
occurring the upstream target does not exercise any
more than 20% of the total voting rights ("decrease
compliance option");
4 or
(b)
make a follow-on offer for the rest of the shares in
the downstream Code company no later than 60 days
after the upstream acquisition becomes unconditional.
16
The election of the compliance option must be notified
to the Panel and to the downstream Code company
(and, if either of the upstream target or the downstream
Code company has its ordinary shares quoted on a
New Zealand registered exchange, notified to the
registered exchange) no later than either:
(a)
14 days after the follow-on offer price is determined
(see below for details about the determination of the
follow-on offer price); or
(b)
the day after the upstream acquisition becomes
unconditional.
Footnotes
- A Code company is defined by the Code as being a New Zealand registered company that: (a) is a party to a listing agreement with a registered exchange and has securities that confer voting rights quoted on the registered exchange's market; or (b) was within paragraph (a) at any time during the period of 12 months before a date or the occurrence of an event referred to in the Code; or (c) has 50 or more shareholders.
- For the purposes of determining the enterprise value, debt in the downstream company consolidated in the upstream company is excluded. Where a company is listed, an assessment of its enterprise value will involve an assessment of its market capitalisation. If a company is not listed, the Panel will decide the appropriate methodology.
- Other factors that may indicate an upstream acquirer's purpose include: (a) public statements that indicate a purchaser's intentions one way or the other; (b) the fact of a previous offer having been made for
the Code company (which could indicate that the downstream acquisition was a significant purpose); (c) any association or aggregation of voting interests or entitlements in the downstream Code company,
caused by the upstream acquisition (which could probably suggest a significant purpose to acquire the voting rights); or (d) cross shareholdings or board memberships between any of the offeror, the
upstream target, the downstream company, and their associates (again, this could indicate that a significant purpose was to acquire the downstream Code company voting rights).
- This assumes that the upstream acquirer did not hold or control any voting rights in the downstream Code company prior to the upstream acquisition.