Applying Canterbury Frozen Meat to rule 49(2)

The Panel considers that Canterbury Frozen Meat should be applied to rule 49(2) as set out below.

Category 1 (expenses related to notices and target company statement obligations)

In broad terms, this category is directed to the regulatory obligations of target company boards in responding to takeover offers. The manner in which the category is expressed by the Court reflects the limited regulatory requirements of both the Companies Amendment Act 1963 and the law generally in 1972. Applying the principle to which this category is directed in the light of today's takeover environment, the Panel recognises two parts to this general category:

• Part 1 - costs incurred in complying with the procedural requirements of the Takeovers Code. By way of example, such costs would include costs associated with:
  • preparation, printing and supply of target company statement
  • preparation, printing and supply of the Independent Adviser's report
  • the supply of the share register
  • approving variations to the takeover offer where prior approval of directors of the target company has been sought under rule 44(1)(b)(ii)
  • attendances with the Panel in relation to target company statement
• Part 2 - costs incurred in complying with the law and directors' fiduciary obligations which touch on the target company's response to a takeover. By way of example, such costs may include costs for:
  • meeting NZX requirements
  • meeting Securities Markets Act requirements (e.g. substantial securityholder and continuous disclosure requirements)
  • satisfying itself through advice, that it (the target company) is not engaging in defensive tactics in breach of the Code
  • monitoring the bidder's compliance with the Code for issues which may affect target company shareholders
  • instigating complaints (provided they are not vexatious or an abuse of process) to the Panel which arise from actions of the bidder which may affect target company shareholders
  • responding to complaints made to the Panel by the bidder or associates of the bidder (other than in respect of actions or omissions of the target company which the Panel determines have caused a breach of the Code).

Expenses which are incidental to the above should also be recoverable. It is recognised that there may be some overlap between Part 1 and Part 2.

Costs imposed by the Panel under the Takeovers (Fees) Regulations 2001 for enforcement action taken under section 32 of the Takeovers Act 1993 are not recoverable.

Category 2 (expenses for countering propaganda)

The Panel considers that this is an appropriate category, but should be treated as a subset of Category 3 below.

Category 3 (expenditure incurred otherwise for the purpose of safeguarding the offerees' interests)

The Panel considers that this is an appropriate category. The Panel notes that the Court in Canterbury Frozen Meat suggested that share value might be a key measure of offerees' interests. In the modern takeover environment the Code identifies the merits of the bid as a key measure of offerees' interests, and value as simply a subset of this, with its importance varying depending on the nature of the relevant bid. For example, in a partial bid, the consequences of the bid both in terms of the control of the target company and the affect on a shareholder's holding are of critical importance.

The Panel considers that a broad view must be taken of offerees' interests consistent with the Code's focus on merits. This focus covers, in the Panel's view, any steps taken in relation to matters such as:

• expenses incurred by directors in fulfilling their fiduciary responsibilities in a takeover to act in the interests of the shareholders;
• expenses incurred in ensuring that shareholders are properly informed; there being two aspects to this:
  • the directors putting themselves in a position to be able to give advice to shareholders on the merits of the bid. It needs to be recognised that takeovers are rare events in the life of a company and as such directors commonly have no experience of takeovers and consequently little knowledge of how to respond to them. In order to respond properly they need to retain experts versed in these matters (whether financial, legal, strategic or otherwise) to provide advice so that they are in a position to ensure that shareholders are properly informed.
  • the communicating of received advice to shareholders, effectively and appropriately. Depending on the circumstances, this may require the need to retain PR consultants and the need to provide that communication by way of public notices.
• expenses incurred in countering propaganda calculated to influence the offerees' choice are a part of seeing that shareholders are appropriately informed. The situation sometimes arises, particularly in hostile takeovers, where target company shareholders receive information from the bidder extolling the virtues of the bid and/or criticising the performance of the incumbent management and board. The target company must be able to respond to such information in a balanced and meaningful way and should be able to recover its costs in doing so.

Category 4 (Director reimbursement for expenses properly incurred in the interests of shareholders)

• The Panel considers that this is an appropriate category. This category would include expenses incurred by the directors in relation to additional board attendances to consider the merits of the takeover and other takeover matters.

The Panel agrees with the Court's view that in examining any particular item of expenditure, reasonableness should be judged with reference to circumstances existing when the expenses were incurred and not, with the benefit of hindsight, as to what, in the light of events, proved to be strictly necessary.

In Canterbury Frozen Meat the Court took the view that expenses incurred for the purpose of resisting a takeover bid are not recoverable. In the Panel's view, a distinction needs to be made between:

• expenses incurred by the board of the target company in "resisting a bid" by engaging in defensive tactics which are not permitted by rule 38 of the Code. The Panel considers that these expenses are what the Court considered as being not properly incurred in Canterbury Frozen Meat. These expenses, which may include items such as the costs of sale of key assets, are not recoverable under rule 49(2); and
• 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. These expenses, mostly related to communications with shareholders, should be recoverable under Category 3 above, as they are incurred in trying to ensure that shareholders are fully informed when making a decision as to whether to accept or reject a takeover offer.

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.

Rule 49(2) provides that expenses properly incurred by the target company in relation to an offer or a takeover notice are recoverable from the bidder. Canterbury Frozen Meat does not address the issue of recovery of expenses incurred prior to the target company receiving an offer or takeover notice.

It is the Panel's view that, although generally speaking it will be easier for the target company to show that expenses incurred by it, after the target company had received a takeover notice, were incurred in relation to an offer or a takeover notice, this does not preclude the recovery of expenses incurred by the target company prior to receiving a takeover notice, provided that such expenses were properly incurred in relation to an offer or a takeover notice.

Regardless of whether the expenses of the target company were incurred prior to, or after, the receipt of the takeover notice by the target company, such expenditure will only be recoverable from the bidder if there is a sufficient nexus between the incurring of the expenditure and the offer or the takeover notice. Such nexus can only be determined on a case by case basis.