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STATEMENT OF INTENT2006/2007 - 20094. HOW THE PANEL INTENDS TO PERFORM ITS FUNCTIONS AND CONDUCT ITS OPERATIONS TO MEET ITS OBJECTIVE AND ACHIEVE ITS IMPACTS4.1 The Panel comprises ten members experienced in accounting, business or law. This is the governing body of the Panel, and exercises all the Panel's powers. The chairman is an experienced commercial lawyer and company director.
4.2 One of the features of the Panel's operations is its ability to form "divisions", comprising a minimum of three members, to attend to most matters before the Panel. Under the Act the appointed division is "the Panel" for the particular matter.
4.3 The only times where the Panel is not able to operate by divisions is where it is considering class exemptions or is making recommendations to the Minister for changes to takeovers law. In practice the great bulk of the Panel's work is done by divisions.
4.4 The Panel has a small professional executive team, primarily lawyers, with the Senior Executive Officer who is an accountant, to support the Panel's operations. The Panel is also able to use the Commission's Communications Manager and an accountant on a part-time basis.
4.5 The Panel has no staff of its own, all staff being employed by the Securities Commission. There are special provisions in the Securities Act to provide that the Commission can provide services to the Panel as one of its functions.
4.6 The Panel has a memorandum of understanding with the Commission which sets out the basis of the relationship between the two bodies. This covers the level of professional staff time and other services (premises, IT systems, phone systems) to be provided by the Commission and the cost to be paid by the Panel. The cost is based on an overall single charge-out rate per professional hour worked for the Panel which covers all the relevant salary and overhead costs.
4.7 The following sections set out in broad terms how the Panel intends to perform its functions and conduct its operations to achieve its impacts.
Framework of the Code (including review of market practices)4.8 The 2005/2006 year has seen considerable resources used on supporting the Ministry in the making of a range of technical amendments to the Code. These were first recommended by the Panel in December 2003. The Panel has an ongoing liaison role with the Ministry and Parliamentary Counsel Office in the development of these regulations.
4.9 The 2005/2006 year has also seen considerable resources used in commenting on law reform proposals promoted by the Ministry, for example in relation to the changes affecting takeovers law being implemented through the Securities Legislation Bill.
4.10 The Panel will continue to draw on its experience with administration of the Code, including its enforcement functions and exemption activities, to identify aspects of the Code where amendment is considered urgent and/or essential. It will work with the Ministry in promoting desirable changes.
4.11 The Panel is concerned at the processes which seem to be required to bring about a change in the Code and intends to explore this issue with the Ministry.
4.12 If the Panel becomes aware of matters in the Code that need urgent amendment it would develop proposals to solve the identified difficulty and circulate those proposals for public comment. Following a period of consultation the Panel would then make appropriate recommendations for change to the Minister.
4.13 The Panel has no current intention of promoting any further technical amendment to the provisions of the Code in the coming years, but could do so. The Panel sees no need to undertake a review of the fundamental provisions of the Code. They are now well understood by the market and firmly entrenched. However, there are problems which need to be addressed in the interrelationship between the Companies Act, the Securities Act and the Takeovers Act as they impact on changes in the control of companies.
4.14 The Panel will use its own staff to develop policy papers, guidance notes and practice notes relating to issues affecting the Code.
4.15 The Panel publishes guidance notes and practice notes to indicate to the market how practitioners should be dealing with particular issues arising under the Code or how the Panel will administer particular sections of the Code.
4.16 As discussed earlier (see paragraph 3.21) the Panel has identified a potential difficulty with the application of New Zealand securities law to takeovers where scrip is offered as consideration. To complement the skills already available to the Panel through its own members and the executive the Panel approached a group of experienced takeovers practitioners who agreed to look into the issue and develop policy proposals for consideration by the Panel. The Panel appreciates the assistance of this group of lawyers.
4.17 All these activities are aimed to ensure the Code fulfills its purpose of providing an efficient basis on which to conduct takeover activity in New Zealand. The level of impact the Panel is able to achieve towards this purpose is affected by the level of resources the Panel is able to put into the activity.
Enforcement of the Code4.18 The Panel makes extensive use of its executive resources for enforcing the provisions of the Code.
4.19 All the main takeover documents are required by the Code to be provided to the Panel at the same time they are served on the target company or sent to the shareholders. On receipt these documents are reviewed by Panel staff for compliance with the Code. Once the prospective technical amendments to the Code are promulgated takeover participants will be obliged to send the Panel any other documents sent to shareholders relating to the offer or transaction.
4.20 It is common for compliance issues to be identified in takeover documents reviewed by Panel staff. The Panel is also made aware of compliance issues through complaints by shareholders and other principal parties to a transaction.
4.21 The Panel executive routinely monitors NZX company announcements and (including through a clipping service) New Zealand newspapers for transactions which appear to have Code implications.
4.22 Where issues are relatively minor these are usually dealt with in discussion with the legal advisers to the party involved. Appropriate correcting action is taken by agreement and without recourse to the Panel's formal powers.
4.23 Where more serious issues arise the matter may be referred to a division of the Panel. If the Panel considers there may be non-compliance then the non-compliant party will be advised of this and told the correcting action the Panel considers is necessary.
4.24 If non-compliance appears to be reasonably serious and the issues cannot be resolved then the Panel is likely to exercise its formal powers and convene a meeting under section 32 of the Act.
4.25 The Panel normally retains senior external counsel to assist with such meetings. A section 32 meeting must be held within 7 days of being called and the Panel must reach a decision within two days of calling the meeting if restraining orders are to be made or continued. Each meeting usually involves four Panel members and two members of the executive. They are often for a full day but on occasion have taken two full days. The Panel's full decision will be advised to the parties and published as quickly as possible, usually within two days of the meeting.
4.26 If the Panel has determined that non-compliance has occurred then it is likely to issue restraining orders freezing the situation for up to 21 days. This period allows the parties to resolve the matter with the Panel or for the Panel to take the matter to Court to have the Court make final orders.
4.27 If matters proceed to Court the Panel may use the services of a law firm to provide litigation support.
4.28 The Panel has a litigation fund of $675,000 provided by the Crown to meet the costs of litigation it initiates or to which it has to respond. The Crown is committed to topping up this fund (within limits) as it is used.
4.29 The section 32 process is very intensive and the Panel aims to have adequate staff to enable more than one section 32 action to be undertaken at any one time.
4.30 The Panel believes that the resources it puts into enforcement of the Code provide a reasonable prospect that breaches of the Code, particularly where they involve listed companies, will be detected and investigated. Unfortunately there is no reliable way to measure precisely how compliance standards are improving. The evidence is anecdotal.
4.31 In 2006/07 and future years the Panel's enforcement role will be significantly expanded by changes being made to the Code through the Securities Legislation Bill particularly concerning the prohibition on misleading and deceptive conduct in takeover transactions.
4.32 The Panel has been preparing for these changes by developing policies for dealing with complaints that may arise under the expanded provisions of the Code and by researching the law underlying the new provisions. When the new provisions come into force the Panel will be ready.
4.33 The aim of enforcement activity is to raise the standard of compliance with the Code and thus facilitate the operation of the takeovers market. Sometimes this may mean having to have share acquisitions that were made in breach of the Code unwound by a sale of shares. Often it means having to have documents corrected. In the more extreme cases it may be necessary to have recourse to the Courts in order to achieve an appropriate and effective solution.
4.34 From the feedback the Panel receives it is clear that the Panel is having a significant impact on the level of compliance with the Code.
The power to grant exemptions4.35 Next to enforcement the Panel's highest priority activity relates to the exercise of the power to grant exemptions from the Code.
4.36 The Code is a reasonably brief document expressed in quite broad terms. This means that there are many occasions where its provisions do not "fit" a particular transaction or where its strict application would have unintended or unexpected consequences.
4.37 The Panel receives many requests for exemptions. A significant number are declined because they are either inappropriate or their granting would be inconsistent with the objectives of the Code. The Panel will not grant exemptions that attempt to alter any of the fundamental parameters of the Code.
4.38 As discussed earlier (see paragraph 4.16) an issue for the Panel is the interaction between the scheme of arrangement provisions in Part XV of the Companies Act, the amalgamation provisions in Part XIII of the Companies Act, and the mechanisms provided in the Code as they relate to changes in control of code companies.
4.39 There are no statutory exemptions from the Code for transactions undertaken under Parts XIII and XV of the Companies Act, and nor are there any statutory provisions that preclude code companies from using the provisions for schemes of arrangements and amalgamations in the Companies Act.
4.40 Some amalgamations and schemes, depending on how they are structured or (in the case of schemes) presented to the Courts, do not come within the jurisdiction of the Code. Other schemes and amalgamations are covered by the Code and may require an exemption from the Panel before they can proceed. Sometimes schemes can proceed using the existing provisions of the Code.
4.41 These exemptions, where requested, have proved very challenging for the Panel. The Panel has recently released a discussion paper seeking public submissions on the policy it proposes to follow in considering these exemptions. The paper also asks specifically about the interrelationship between the Code and the amalgamation and scheme provisions of the Companies Act.
4.42 When an exemption application is received the Panel executive analyses the issues arising from it. After clarifying any outstanding issues with the applicant the executive prepare a report for the responsible division appointed to deal with the matter. This report is then considered by the Panel (being the responsible division) and a decision made. If it is decided to grant an exemption instructions are given to Parliamentary Counsel Office to draft the particular exemption. After checking this is signed by a member of the Panel (usually the Chairman) and published in the Gazette.
4.43 The Panel aims to meet the timing requirements of the market for exemptions. This can sometimes impose considerable strain on the Panel's resources. Exemptions are a significant area of work for the Panel's members and executive. The aim in granting exemptions is to retain all the disciplines and policies of the Code but also to avoid unintended or unexpected outcomes arising from the application of the strict rules of the Code.
4.44 Every exemption granted improves the functioning of the market by removing an impediment contained in the existing law or by providing a framework within which an otherwise legitimate transaction can be undertaken where none is contained in the Code or any existing class exemptions.
Approvals under the Code4.45 A further important part of the Panel's activities involves the granting of approvals for independent advisers to carry out various roles under the Code and for the appointment of independent experts where required by rule 57 of the Code.
4.46 The Panel has published its policy for the approval of advisers on its website. Any time that an adviser is required under rule 18, rule 21 or rule 22 of the Code the company required to appoint the adviser will go through a process to find a suitable adviser and then that adviser will apply to the Panel for approval.
4.47 The application is processed by the executive. If there are any queries about the independence or competence of the adviser these are taken up by the executive. New advisers are asked to produce copies of their past work so that the Panel can assess their experience and competence. The executive then reports to the responsible division of the Panel, which will make a decision on the application.
4.48 The Panel aims to approve applications within 3 working days of receiving a completed application with all information required by the Panel. It usually achieves this aim.
4.49 To try and maintain a good standard of adviser reports the Panel published a guidance note about the role of independent advisers in July 2003. This is available on the Panel's website and outlines the Panel's expectations in relation to each type of report required under the code.
4.50 In furtherance of this aim the Panel also has a policy of having the executive review draft reports before they are sent to shareholders. Given the tight deadlines in the Code most often these reviews have to be undertaken in less than 48 hours. Many reports are of a high standard and may require no comment or need correction only on a few points relating to Code matters. Unfortunately other reports have required considerable executive input, sometimes resulting in the Panel seeing several successive drafts.
4.51 Two or three advisers have been told by the Panel that they will not be approved again. Those advisers have been given the right to be heard by the Panel.
4.52 The Panel has no doubt that the standard of independent adviser reports prepared under the Code has been improved as a result of the standards it has adopted for the approval of independent advisers, the publication of its guidance note, and the effort it has put into reviewing and commenting on draft reports. While the Panel has no plans to change these policies it actively seeks feedback from market participants to ensure its comments are useful and well directed.
4.53 Although the Panel reviews draft adviser reports it never seeks to influence the adviser's assessment of the value of the target company by commenting on valuation outcomes or the merits of the transaction. That would be wholly inappropriate. The Panel's approach is to ensure that these issues are well addressed, including, in particular, both short- and long-term effects on control.
4.54 The Panel itself has the responsibility of appointing independent experts where these are required for the purposes of the Code's compulsory acquisition provisions. When the Panel is required to appoint an independent expert it goes through a process of seeking expressions of interest from firms with valuation expertise that are not already conflicted by previous involvement with the transaction or any of the main parties. The Panel then chooses the most appropriate firm for the assignment.
4.55 The Panel does not review the independent expert's report before it is given to the bidder and the target company. This is to avoid any suggestion that the Panel has influenced the outcome of the valuation.
Public education activities4.56 The Panel uses a number of means to promote public understanding of takeovers law. These include:
4.57 The Panel's promotion role involves most members and the executive.
4.58 The Panel shares its Communication Manager with the Commission. She and her staff are responsible for producing Code Word and maintaining the Panel's website.
4.59 Most public speeches are given by the Chairman of the Panel. The feedback meetings, of which there were some 14 in 2005/2006, involve three to four Panel members and a representative of the executive. The format of these meetings will be varied over time. All of the executive are involved with telephone and written enquiries from the public.
4.60 Takeovers tend to attract their own publicity, for a variety of reasons. It is on such occasions that questions about the application of the Code are often raised. The Panel is willing, through its senior personnel, to assist journalists with background information so that the public will get an accurate understanding of issues of public interest.
4.61 The Panel believes that its current approach to promoting public understanding of takeovers law is effective in raising the level of public understanding of takeover law and is appropriate given the level of the Panel's resources that it has available to put into this activity.
International liaison4.62 The Panel co-operates with overseas takeovers regulators when asked to do so and within the limits of its powers. The Panel calls on assistance from overseas regulators when there is a need to do so. This has proved invaluable recently in relation to proposed merger transactions involving Australian and New Zealand companies.
4.63 The membership of the Australian Panel by the Panel's Chairman, and of New Zealand's Panel by a member of the Australian Panel, ensure ongoing close linkages between the two regulators. These appointments were made pursuant to the Government's aims of progressing a single economic market with Australia within the framework of the Memorandum of Understanding on Business Law Coordination between the two countries.
4.64 The New Zealand Panel has been represented at two recent international conferences of takeovers regulators and will continue to support the formation of an informal grouping of takeovers regulators currently being promoted by Australia. Relationships with other regulators are enhanced by participating in these conferences and by being part of the informal grouping of regulators.
4.65 The Panel spends only a modest sum on this output. The principal expenditure is on participation in overseas conferences when these occur. The Panel has received no notification of the time or place of the next takeovers regulators conference.
4.66 The Panel is satisfied that its current activities enhance and improve the level of co-operation with overseas takeover regulators without the need for significant expenditure.
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