The Panel's preferred option recognises international comity by preventing both the upstream target, and the downstream Code company shareholders, from inhibiting a bona fide upstream takeover. It achieves this by removing the ability for an upstream target to make itself takeover proof. The preferred option does this through:

The Panel does not currently have an established exemption policy for upstream acquisitions. The Panel considers that its preferred option achieves certainty by setting out an exemption policy, with a certain set of rules, and which would provide clear guidance to the market of the factors that the Panel will take into account when considering applications for exemptions for upstream acquisitions.

The Panel considers that its preferred option is both pragmatic and consistent with the objectives of the Code. In particular, the efficient allocation of resources objective and the cost/benefit objective would be met by the preferred option being implemented.

The Panel would have a clear, published policy on upstream takeovers. Accordingly, upstream acquirers would know in advance the criteria that the Panel would assess in considering whether it will grant an exemption. Where an upstream acquirer satisfies the Panel's policy and an unconditional exemption is granted, compliance costs will be reduced for the upstream acquirer. The Panel considers that the preferred option provides an appropriate balance between the costs for the upstream acquirer on the one hand and any effect on the downstream Code company shareholders on the other.

The Panel considers that it would generally be appropriate to exempt upstream acquirers from having to comply with the Code for an incidental acquisition of control of a downstream Code company where compliance with the Code would result in a change of control following a large international or domestic transaction that would have no effect on the downstream Code company's shareholders. In this regard, the Panel accepts the position adopted in Australia that, provided the purpose test is met, there is no benefit for the target company shareholders relating to the acquisition of control of the downstream company and, therefore, no reason for the downstream Code company shareholders to be involved in the transaction.

Some of the submitters on the April 2009 discussion paper suggested that the Panel grants a class exemption based on a purpose and value test. Some of these submitters suggested that the Panel should have discretion to intervene in the transaction, notwithstanding that the purpose test had, or had not, been met.

Because the purpose test is uncertain, difficult to articulate, and would require Panel discretion, a class exemption based on the purpose test would not achieve certainty. In almost all of the submissions received on the Panel's April 2009 discussion paper, the problem with upstream takeovers was identified as being uncertainty in the market as to whether the Panel would grant an exemption in any particular case.

The Panel considers that the preferred option both provides certainty and transparency, and is consistent with other jurisdictions where discretion is given to the regulator as to whether exemptions should be granted or relief given. In particular, the preferred option is consistent with the Australian approach as set out in RG71 (except that the value test for determining purpose is lower in the Panel's preferred option (25%) than in RG71 (50%)).

In Australia, the starting point for relief for upstream acquisitions is the exception in Item 14 of section 611 of the Corporations Act, with the safety net of the Australian Panel being able to declare unacceptable circumstances. It seems appropriate that the starting point in New Zealand should be consistent with the approach in RG71, as the New Zealand Panel does not have the power to declare unacceptable circumstances.

The April 2009 discussion paper was released on 17 April 2009 and the closing date for submissions was 12 June 2009. The Panel received nine submissions in total. Six of these were from major law firms in New Zealand that offer advice on takeover activity. Submissions were also received from an investment banker, an individual investor and the New Zealand Law Society.

In answer to the question in the discussion document relating to whether there is a problem that requires fixing, all submitters agreed that there is a problem and that the discussion document explains the problem adequately. Some submitters commented on and agreed with the specific problems addressed in the paper. However, most submissions identified the main problem as being uncertainty as to whether the Panel would grant an exemption and, if so, on what terms.

All of the respondents either generally agreed with the policy objectives used in the discussion document or made no comment on them. In relation to the question asking whether other objectives should be included for assessing the options, respondents largely made no comment or indicated that no other objectives were necessary. However, two of the submitters suggested that principles of international comity, transparency and certainty should be included as policy objectives.

In response to the question asking whether some objectives are more important than others, respondents generally made no comments. However, one submitter was strongly of the view that the fair treatment of shareholders objective is the most important principle and is more important than the principles of international comity. One submitter suggested that the objective of promoting the international competitiveness of New Zealand's capital markets and the cost/benefit objective require particular consideration. Another submitter commented that, in the context of upstream takeovers, the principles of international comity are more important than the objective of encouraging competition for control.

In response to the question regarding which was the preferred option, there were varying views.

Two submitters preferred option 2a (a class exemption subject to purpose test and 50% value test). Another submitter was in favour of option 2b (a class exemption with focus on purpose test and 25% value test), but with Panel discretion to intervene where appropriate.

One submitter preferred either option 2a or 2c (a class exemption with focus on purpose test and 50% value test and reputable jurisdiction requirement). That submitter noted that any option with a certain set of rules, complemented by the Panel's power to grant specific exemptions where appropriate, would be preferable.

Two submitters were in favour of option 2c, but with a lower threshold for value (for example, 25%). One of those submitters also proposed a further option that was not included in the April 2009 discussion paper. The further proposed option was a class exemption for upstream takeovers, as for option 3 (a class exemption subject to the upstream target being listed on a prescribed exchange) but subject to: (a) a reputable jurisdiction requirement; and (b) the acquirer providing the Panel with an enforceable divestment undertaking under section 31T of the Takeovers Act, in a form acceptable to the Panel (analogous to the divestment undertakings provided to the Commerce Commission under section 69A of the Commerce Act 1986).

One submitter was in favour of either option 2b or option 2c. That submitter considered that a reputable jurisdiction requirement might be appropriate but that there should be no distinction between listed and unlisted upstream entities.

One submitter preferred an alternative option, being a 'predominant purpose test'. The predominant purpose test would contain a value test but it would not be an entrenched black letter rule. The test would provide safe harbour rules but the Panel would have discretion to intervene.

Another submitter preferred another alternative option, being a class exemption for upstream takeovers based on the purpose test. However, that class exemption would be subject to a condition that a follow-on offer be made for the downstream Code company at fair value.

No submitter was in favour of option 3 (a class exemption where target listed on prescribed exchange) or option 4 (a class exemption as in option 3 but with the Panel having discretion to declare unacceptable circumstances). The Panel having the power to declare unacceptable circumstances was regarded by all submitters as inappropriate. Generally the comments in relation to unacceptable circumstances were that it would increase rather than decrease uncertainty around Code compliance obligations for upstream takeovers. One submitter also commented that complaints of unacceptable circumstances are often used in Australia as tactical tools by transaction participants. That submitter and another submitter both commented that it is possible that a similar approach may occur in New Zealand if unacceptable circumstances were introduced. One submitter also commented that the introduction of a new concept, by way of exemption rather than through the usual regulatory processes (an amendment to the Code or the Act) would not be appropriate.

All but one of the submitters agreed that a class exemption, subject to a purpose test, would be appropriate.⁴¹ One submitter was of the view that a class exemption, subject to a purpose test, should also be subject to a condition that always requires the upstream acquirer to make a follow-on offer.

The other submitters who were in favour of a class exemption, subject to a purpose test, had differing views as to how the purpose test should be applied. There were also differing views as to whether a value test would be appropriate, and, if it were appropriate, the level at which the value test should be set.⁴² One submitter noted the difficulties that an upstream acquirer might have in determining value.⁴³

Eight of the nine submitters were of the view that there should be no distinction between whether the upstream target is listed or unlisted. The other submitter made no comment on this issue.

Six submitters commented that, based on the information in the discussion paper, a reputable jurisdiction requirement appeared to be unnecessary. One submitter noted that there may be some pragmatic benefits to adopting a reputable jurisdiction requirement, but that there does not appear to be any obvious principles-based justification for the reputable jurisdiction requirement. The submitter commented that the introduction of such a requirement could promote avoidance, but no reasons were given for that view.

Two submitters were in favour of a reputable jurisdiction requirement. Those submitters did not provide reasons for their views. However, one of the submitters noted that this requirement would reduce the risk of abuse of any class exemption, although that risk was thought to be negligible, given that the purpose test would also be included.

Three submitters were of the view that any class exemption based on a purpose test should leave some discretion for the Panel to intervene if the Panel believed that the purpose of the upstream takeover was to acquire the downstream Code company, even though a prescribed 'purpose test' might have been met. It was also submitted that, even if the purpose test were not met on its face, the Panel should be able to approve an upstream takeover (that is, grant a specific exemption) where it was clear to the Panel that the purpose of the upstream takeover is not to acquire the downstream Code company.

One submitter commented that, if the Panel grants a class exemption whereby it retains some discretion, the Panel should be notified in advance of the upstream acquirer's reliance upon the exemption, so that the Panel is able to exercise that discretion.

One submitter commented that the purpose test would provide the Panel with a broad and appropriate discretion to guard against avoidance of the Code. If the Panel considered that the purpose test was not satisfied, it would have the usual array of enforcement tools, as set out in the Takeovers Act, available to it. However, that submitter, and others, commented that the Panel should provide guidance to the market as to how it would apply the purpose test and what factors it would take into account.

One submitter suggested that the Panel publish a guidance note as to the matters and shareholding thresholds which it considers may constitute a change in control in a downstream Code company as a result of an upstream takeover.⁴⁴

The Panel is grateful for the effort undertaken by submitters on the April 2009 discussion paper.

The Panel now welcomes submissions on its preferred option and the draft guidance note in the Appendix.