Change of control conditions

Individual exemptions from rule 16(b) of the Code have usually been granted on a number of conditions, including the following ‘control change' conditions:

(a)

that a proposed allottee does not become the holder or controller of an increased percentage of voting securities, other than as a result of the particular allotment, during the period specified in the exemption (which is generally until the expiry of any convertible securities or until the last allotment under the transaction);

(b)

that a proposed allottee does not increase its voting control at any time, during the period specified in the exemption, to a percentage above the maximum percentage of voting securities that was disclosed in the notice of meeting ("approved maximum percentage"); and

(c)

that there is no change of control of any corporate entity that has the benefit of the exemption, during the period specified in the exemption.

The purpose of these control change conditions has been to constrain an exemption to its intended purpose. However they may be unduly restrictive. The Panel considers that any of these control change events should be able to occur, provided that shareholders of the Code company are fully informed of the effect of existing transactions before deciding whether to approve the further change of control. Accordingly, to provide flexibility, the control change conditions have been modified for the Rule 16(b) Class Exemption as follows:

(a)

an exempted person can increase its control by a means other than under the specified transaction ("other means increase"), and an exempted person that is a body corporate can have a change of control upstream ("upstream change of control"), and still enjoy the benefit of the Rule 16(b) Class Exemption, provided that:

(i)

the other means increase, or the upstream change in control, occurs by way of an acquisition under rule 7(c) of the Code or an allotment under rule 7(d) of the Code for which shareholder approval is obtained, or by way of another exemption granted by the Panel; and

(ii)

where the other means increase occurs by way of an acquisition or an allotment under rule 7(c) or 7(d) of the Code, full disclosure of the specified transaction under the Rule 16(b) Class Exemption must be made to the Code company's shareholders in the notice of the meeting to be held to approve the other means increase or the upstream change of control; and

(b)

an exempted person can increase its control to a percentage above the approved maximum percentage, but only as a result of an other means increase undertaken in accordance with paragraph (a) above.

Buybacks Class Exemption

A buyback is the acquisition by a company of its own shares. The Code is relevant to buybacks by Code companies because shareholders who are (together with their associates) near to or over the 20% threshold of rule 6 of the Code (the fundamental rule) may have their control percentage increased as a result of a buyback and could therefore potentially breach rule 6 of the Code.

While acquisitions and allotments occur as the result of a conscious decision and positive action by the party increasing its voting control, buybacks can potentially result in inadvertent breaches of the fundamental rule because the increase in voting control is a result of non-action (i.e., non-participation in the buyback). Shareholders wishing to retain their resulting increase in control would, until recently, have relied on the Clause 4 Class Exemption. The Clause 4 Class Exemption has been revoked and replaced with the new Buybacks Class Exemption.

The Buybacks Class Exemption allows the shareholders relying on it to increase their control percentage, with the approval (by an ordinary resolution) of the other shareholders of the company, who are not associates of the exempted person. The other shareholders make this decision on the basis of disclosures in the notice of meeting of the details of the potential maximum of the increase in the exempted person's voting control that could occur as a result of that person not participating in the buyback. The Buybacks Class Exemption requires that an independent adviser's report be provided for the shareholders, on the merits of the buyback and the resulting increase in the exempted person's voting control in the Code company.

The Buybacks Class Exemption has been drafted to be consistent, where relevant, with the Rule 16(b) Class Exemption. The Rule 16(b) Class Exemption accomodates long-term allotment periods. Similarly, the Buybacks Class Exemption does not inhibit buybacks from occurring over a long period of time.

As with the Rule 16(b) Class Exemption, the conditions of exemption require ongoing disclosures about the control positions of exempted persons, in the Code company's annual reports and on its website, where transactions occur over a period of more than 12 months.

The Buybacks Class Exemption also includes the same conditions as the Rule 16(b) Class Exemption in relation to other means increases and changes of control above the approved maximum percentage.

In addition, the Buybacks Class Exemption clarifies that shareholders' approval of the buyback is for the purposes of the Buybacks Class Exemption only. It is not an approval under the Companies Act 1993 and if, for some reason, shareholders did not approve the buyback for the purpose of an exempted person's increasing of its control percentage, the company could still do the buyback.

The person who had wanted to increase its control percentage would then have to either participate in the buyback to ensure that its control percentage wasn't increased, or sell down in accordance with clause 5 of the Class Exemptions Notice.¹¹

The new Buybacks Class Exemption also clarifies that there can be multiple resolutions to approve a buyback in accordance with the Buybacks Class Exemption. This means that a person (and any associates) is only restricted from voting on resolutions that relate to that person's own increase in voting control. In the case of a non prorata buyback, the disposer of shares (and any associates) is prohibited from voting in favour of the resolutions.

The Buybacks Class Exemption and the Rule 16(b) Class Exemption commenced on 29 November 2010. They appear complex, but the Panel executive is there to help if any clarification is required.

Guidance note – rule 30 of the Code and changes to the capital structure of the target company during the offer period

In the circumstances where the capital structure of a target company changes during the offer period, compliance with the Code can appear to be complex. The Panel wishes to clarify the application of rule 30 of the Code, which relates to certain cases where the offeror wishes to vary the terms of the offer, where there have been changes to the capital structure of the target company during the offer period.

A full takeover offer made under the Code must extend to each class of equity securities (if there is more than one) in the target company. In such cases, rule 8 of the Code provides:

"...

(3)

If there is more than 1 class of voting securities included in a full offer, the consideration and terms offered for each class of voting securities must be fair and reasonable as between the classes of voting securities.

(4)

If non-voting securities are included in a full offer, the consideration and terms for non-voting securities must be fair and reasonable in comparison with the consideration and terms offered for voting securities and as between the classes of non-voting securities."

If there is more than one class of equity securities under offer, the offeror must obtain an independent adviser's report that certifies the fairness and reasonableness of the consideration as between the different classes of securities (rule 22 of the Code).

Rules 27 to 32 of the Code prescribe various requirements in respect of the variation of offers. Briefly, the offeror may vary the offer to either: increase components of the consideration; add a cash component to the consideration; add a cash alternative to the consideration; or extend the offer period. The offeror must issue a variation notice if it varies the offer.

Rule 30 of the Code provides, in effect, that if the offeror varies the offer consideration, and the offer includes offers for more than one class of securities, the offeror must obtain a further report from an independent adviser certifying that the offer is (still) fair and reasonable as between the classes of securities included in the offer. The purpose of the further report is to ensure that offerees in one class of security are treated fairly vis-à-vis the offerees in another class of security, following the variation.

There may be circumstances, however, where it would be redundant for the offeror to obtain a further report from an independent adviser. For example, consider a target company which, at the time that a takeover offer is made, has on issue two classes of securities: ordinary shares and convertible notes. These convertible notes are set to convert into ordinary shares on a date that falls during the takeover offer period. The offeror, in this example, would be required by rule 8(4) of the Code to make its offer for both the ordinary shares and the convertible notes issued by the target company.

The terms of the offer would likely provide that any acceptances in respect of convertible notes that convert into shares become acceptances in respect of the resulting shares. The offeror would be required to obtain an independent adviser's report that the consideration offered for each class of security was fair and reasonable as between the classes.

During the offer period the convertible notes expire and convert into new ordinary shares in the target company. At some time following the conversion, the offeror elects to increase the consideration in its offer (which had commenced as an offer for two classes of securities). The offeror would be required to issue a variation notice in respect of the increased consideration. Rule 30 of the Code requires that when an "offer" to which rule 8(4) of the Code applies is varied by the offeror to increase the consideration, the offeror must obtain a further report from an independent adviser that the varied offer is fair and reasonable as between the classes of securities under offer. In this example, however, the report would be redundant because, at the time of the variation, only one class of security in the target company is extant.

The Panel considers the offeror should not be required to obtain a further independent adviser's report when to do so would be unnecessary. Rule 30 of the Code can be interpreted purposively in order achieve this outcome. The purpose of rule 30 of the Code – to ensure that the consideration remains fair and reasonable as between the classes following a variation – relates to an offer that has settled, or could ultimately settle, in respect of more than one class of security.

Footnotes

Clause 5 of the Class Exemptions Notice provides an exemption for buybacks that are not approved by shareholders under clause 4. It is a condition of the exemption that the exempted person whose control percentage increases as a result of a buyback eliminates the excess control percentage within 6 months and the additional voting rights are not exercised before that decrease.