No two takeovers are alike. For that reason, it is not possible to prescribe which of the expenses which may be incurred by a target company in responding to a takeover offer are payable pursuant to rule 49(2).
Drawing on the principles enunciated in the Canterbury Frozen Meats 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, it must be proved by the target company 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:
(i)
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.
(ii)
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.
(iii)
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 expenses were 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 expenses were 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.
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".
The Panel is seeking comment from market participants on this draft Guidance Note.
After the Panel has considered all comments it intends to publish the finalised Guidance Note on its website and in its newsletter Code Word.
