Draft Guidance Note : Recovery of Expenses Under Rule 49(2)
August 2008
1.
Introduction
1.1
Recent takeover costs disputes have highlighted the market's need for guidance as to the scope of expenses falling within the category of
properly incurred under rule 49(2) of the Code. Rule 49 of the Code provides:
"(1) Despite anything in the constitution of the target company, each director of the target company is entitled to have refunded to the director by the target company any expenses properly incurred by the director on behalf, and in the interests, of holders of equity securities of the target company in relation to an offer or a takeover notice.
(2) The target company may recover from the offeror, as a debt due to the target company, any expenses properly incurred by the target company in relation to an offer or a takeover notice, whether as a result of refunds made under subclause (1) or otherwise."
1.2
In general terms the view of the Takeovers Panel ("Panel") is that the principles put forward by the High Court in Canterbury Frozen Meat Company Ltd v Waitaki Farmers' Freezing Company Ltd [1972] NZLR 806 ("Canterbury Frozen Meat") in considering the meaning of "properly incurred" expenses can be applied to rule 49(2). Canterbury Frozen Meat was in respect of section 11(2) of the Companies Amendment Act 1963, which was similarly worded to rule 49(2) of the Code. Section 11(2) was superseded by rule 49(2).
1.3
The expenses scrutinised by the Court in that case were consistent with the corporate takeovers environment at that time and the facts of the case. Those expenses were relatively confined in nature and included a consideration of expenses incurred in relation to defensive tactics, described by the Court as actions resisting the takeover.
1.4
In the Panel's view, it is not correct to treat the expenses actually approved by the Court in Canterbury Frozen Meat as being exhaustive of what expenses might be properly incurred whether in 1972 or in the current takeovers environment. What is critical is the nature of the expense and whether it falls within the general category of expenses identified by the Court. In making such a determination, regard must be had to the legal and corporate environment in which takeovers occur. Since 1972, law and practice as it affects takeovers has undergone substantial change. The responsibilities, accountabilities and expectations to which target companies and their Boards are now subject in the face of a takeover offer, bear upon the actions they take and the expenses which they incur.
1.5
In publishing this guidance note, the Panel wishes to assist market participants in identifying what costs are properly incurred in terms of rule 49(2). Section 2 discusses Canterbury Frozen Meat. Section 3 of the note highlights the demands made of target companies and their Boards in the current takeovers environment. Section 4 considers how the expenses arising from these demands should be categorised in terms of the general categories recognised by the Court in Canterbury Frozen Meat.
1.6
As the regulator responsible for enforcing the Code, the Panel has jurisdiction to determine compliance with the Code, including compliance with rule 49(2). The Panel stands willing to exercise its jurisdiction in appropriate circumstances.
2.
Canterbury Frozen Meat
2.1
In
Canterbury Frozen Meat the Court was of the view, that before an item of expense can be allowed, it must be proved by the target company:
(a)
that it comes under one of the following four categories:
Category 1 - Expenditure incurred in and incidental to the fulfilment of the target company's obligations in respect of notices, the target company statement and related out of pocket expenses;
Category 2 - Expenditure incurred in countering propaganda by the offeror which is calculated to influence the offerees' choice;
Category 3 - Expenditure incurred otherwise for the purpose of safeguarding the offerees' interests in relation to the takeover scheme, as (for instance) in keeping offerees informed of developments which might affect the value of their shares;
Category 4 - 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 scheme;
and
(b)
that it was reasonable to incur the expense by engaging in that kind of activity;
and
(c)
that it was reasonable to spend that amount on that kind of activity.
2.2
The Court was also of the view that:
- in examining any particular item of expenditure, reasonableness should be judged with reference to circumstances existing when they were incurred and not with the benefit of hindsight to what, in the light of events, may have proved to be strictly necessary;
- expenses incurred for the purpose of resisting a takeover bid are not recoverable1.
3.
Changes in the Corporate Landscape
3.1
The market environment in which takeovers now take place is significantly different and more complex from that which existed in 1972, when
Canterbury Frozen Meat was decided. The changes include:
- significant changes in the law - principally reflected in a greater overall compliance requirement. For example, compliance with:
- Securities Act 1978
- Securities Markets Act 1988 (substantial security holder disclosure, directors' and officers' disclosure, insider conduct and market manipulation prohibitions)
- NZX listing rules
- Takeovers Act 1993 and Code and the establishment of the Panel as the expert body regulating takeovers
- continuous disclosure requirements, requiring (in certain circumstances) a listed target company to take ongoing action;
- new laws regarding misleading or deceptive conduct (now embodied in rule 64 of the Code);
- generally harsher penalties imposed for non-compliance;
- a greater expectation placed on company directors by shareholders and the commercial community with the development of Codes of Conduct for directors;
- a greater public scrutiny of the performance of target company directors;
- a more litigious commercial environment.
3.2
One consequence of the above changes is that, to a much greater extent than in past years, the target company may need to (and perhaps would be expected to) engage professional advisers, consultants and experts (e.g. lawyers, accountants, financial advisers, analysts, public relations experts, market sector experts, etc) to assist it throughout the takeover process. As a result it should be recognised that target companies in the modern takeover environment may properly incur costs that would not have been incurred, or may not have been seen as properly incurred, at the time Canterbury Frozen Meat was decided.
3.3
This environment means that companies subject to takeovers suffer from not only a significant diversion of resources when a bid occurs, but also very real cost which, in some cases, can be quite disproportionate to the size or assets of the target company. Takeover offers can be hostile and in any event do not require the agreement of the target company to be made. Therefore it is important that rule 49(2) is applied in a manner which reflects the realities of a modern takeover and enables all properly incurred expenses to be recovered.
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