Takeovers Panel - Upstream Takeovers

	Upstream Takeovers - a Further Consultation Paper Issued by the Takeovers Panel

Takeovers Panel

UPSTREAM TAKEOVERS

A FURTHER CONSULTATION PAPER ISSUED BY THE TAKEOVERS PANEL

October 2009

EXECUTIVE SUMMARY

An upstream acquisition is an acquisition of an entity ("upstream target") in New Zealand or overseas that holds or controls voting rights in a New Zealand Code company² ("downstream Code company") and that results in the acquirer becoming a controller of those voting rights in the downstream Code company.

The acquisition of control of a downstream Code company may be incidental to the acquirer's purpose of acquiring the upstream target. However, the acquisition of an upstream target can also be effected for the purpose of indirectly acquiring the downstream Code company.

10.

Regardless of the acquirer's purpose, an upstream acquisition may result in the need for compliance with the Code for the acquisition of control of the voting rights in the downstream Code company.

11.

The April 2009 discussion paper described the problems associated with upstream acquisitions, including:

(a)

uncertainty as to the Panel's likely approach when considering specific exemptions from compliance with the Code under the status quo;

(b)

the problem of 'takeover proofing'; and

(c)

the timing and cost issues associated with having to comply with the Code in respect of the acquisition of control in the downstream Code company.

12.

The April 2009 discussion paper proposed the following options for dealing with the Code implications of upstream acquisitions:

(a)

Option 1: Maintain status quo - comply with Code. Panel will consider all exemptions on a case by case basis.

(b)

Option 2a: Class exemption from having to take over the downstream Code company in advance of acquiring control of the upstream target, with focus on purpose test³ and 50% value test.⁴

(c)

Option 2b: Class exemption with focus on purpose test and 25% value test.

(d)

Option 2c: Class exemption with focus on purpose test and 50% value test and requirement that upstream transaction occurs in jurisdiction with investor protection comparable to New Zealand ("reputable jurisdiction requirement").

(e)

Option 3: Class exemption subject to reputable jurisdiction requirement and upstream target being listed in that reputable jurisdiction.

(f)

Option 4: Class exemption subject to reputable jurisdiction requirement, unless unacceptable circumstances.

13.

The Panel sought submissions on the April 2009 discussion paper. The consultation period closed on 12 June 2009. The Panel received nine submissions.

14.

After consideration of the submissions received in response to the April 2009 discussion paper, and further research, the Panel has identified a preferred option.

15.

The Panel's preferred option is that:

(a)

the Panel would consider granting unconditional exemptions, on a case by case basis, from rule 6(1) of the Code,⁵ for an upstream acquirer, where the upstream acquisition would result in the upstream acquirer becoming the controller of more than 20% of the voting rights in a downstream Code company, if:

(i)

the upstream acquisition occurs on a recognised exchange (that is, the target is listed on New Zealand Exchange Limited ("NZX"), or on a foreign exchange where there is a comparable level of investor protection to that in New Zealand);⁶ and

(ii)

acquiring control of the downstream Code company is not one of the main purposes of the upstream acquisition ("purpose test");

(b)

if the value of the assets of the downstream Code company (on a market capitalisation basis) is less than 25% of the assets of the upstream target (on a market capitalisation basis), the purpose test would be prima facie satisfied (however, the 25% value test is only a proxy for purpose, and if one of the main purposes of the upstream acquisition was, in fact, to acquire control of the downstream Code company, the meeting of the value test would be irrelevant);

(c)

the Panel would be unlikely to grant an unconditional exemption if the purpose test was not satisfied or the upstream acquisition was not on a recognised exchange. However, the Panel would be likely to grant an exemption subject to the condition that the upstream acquirer either:

(i)

sells down the shareholding in the downstream Code company to 20% or less and does not exercise any more than 20% of the Code company's voting rights; or

(ii)

makes a follow-on offer for all of the shares in the downstream Code company.

(d)

the Panel would provide guidance to the market, for example in the form of a guidance note, as to the factors that it would consider when determining whether to grant such exemptions. A draft guidance note can be found in the Appendix to this paper.

16.

The Panel is seeking submissions on its preferred option to assist it to finalise its view. The Panel is also seeking submissions on the draft guidance note. The Panel is particularly interested in receiving comments and suggestions about the mechanics of the sell down and follow-on offer requirements (proposals for which are set out later in this paper).

STATUS QUO AND PROBLEM

Status quo

17.

In an upstream acquisition, if the upstream target entity holds or controls more than 20% of the total voting rights in a Code company, the upstream acquirer will usually become the controller of the voting rights in the downstream Code company and must comply with the Code in respect of that downstream acquisition.⁷

18.

Before the upstream acquirer gains control of the upstream target (and therefore of the target's voting rights in the downstream Code company), the acquirer, in order to comply with the Code, must have:

(a)

obtained the approval of the downstream Code company's shareholders by way of ordinary resolution under rule 7(c) of the Code; or

(b)

completed a takeover of the downstream Code company under rule 7(a) of the Code.

19.

If the upstream acquirer made a takeover offer for the downstream Code company, it would need to do so contemporaneously with, or in advance of, its acquisition of the upstream target. It would need to have included in the upstream takeover offer appropriate conditions to ensure that it did not gain control of the upstream target, and, therefore, of the upstream target's stake in the downstream Code company, until the takeover offer for the downstream Code company succeeded. Likewise, downstream shareholder approval of the upstream acquisition, under rule 7(c) of the Code, would have to have been completed before the upstream acquisition became unconditional.

20.

The alternative to complying with the Code's requirements is to obtain an exemption from those requirements.

Footnotes

A Code company is defined by the Code as being a New Zealand registered company that: (a) is a party to a listing agreement with a registered exchange and has securities that confer voting rights quoted on the registered exchange's market; or (b) was within paragraph (a) at any time during the period of 12 months before a date or the occurrence of an event referred to in the Code; or (c) has 50 or more shareholders.
That is, whether the purpose of the upstream takeover is to obtain control of the downstream Code company.
That is, the value of the shares held in the downstream Code company by the upstream target is 50% or more of the value of the upstream company's assets.
Rule 6 is the "fundamental rule". It prohibits a person from increasing their holding or control of voting rights in a Code company above 20% of the total voting rights on issue, except by using one of the mechanisms in rule 7, which provide regulated processes for increasing above the 20% threshold.
The Panel considers the following foreign exchanges to be "recognised exchanges": The Australian Securities Exchange, The American Stock Exchange LLC, Deutsche B�rse AG, Euronext Amsterdam NV, Euronext Paris SA, Italian Exchange SpA, JSE Securities Exchange South Africa, Kuala Lumpur Stock Exchange, London Stock Exchange plc, The NASDAQ Stock Market Inc, New York Stock Exchange Inc, Singapore Exchange Limited, The Stock Exchange of Hong Kong Limited, Swiss Stock Exchange, Tokyo Stock Exchange, The Toronto Stock Exchange Inc.
The question of whether an upstream acquisition results in an acquirer becoming a controller of voting rights in a downstream Code company is not always certain. There are clear cases where effective control over the downstream parcel will be achieved (for example, the takeover succeeds and the upstream acquirer obtains 100% control of the upstream entity). If the acquirer achieves less than full control of the upstream entity, the extent to which it will gain control of the downstream Code company, and therefore will be subject to the Code, will depend on the circumstances.

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