The New Zealand Government has adopted a Takeovers Code which will come into force on 1 July 2001.

The code aims to encourage and facilitate takeover activity and to enable all shareholders to take part in the process on the basis of equal treatment and full disclosure.

The code is administered and enforced by the Takeovers Panel under the Takeovers Act 1993.

Nature of the code

Unlike the City Code in London, the New Zealand code is not a mandatory offer regime. The New Zealand code is an enhanced participation regime designed to ensure that all shareholders are able to take part in the takeover process. A similar approach is taken in the Australian code.

The code applies to "code companies", that is, New Zealand registered companies which are:

• listed on the New Zealand Stock Exchange; or
• have been listed on the exchange in the past 12 months; or
• have 50 or more shareholders and $20 million or more of assets.

A person wishing to acquire 20% or more of the voting securities of a code company can only do so in compliance with the code. Broadly this means an offer to all shareholders or an acquisition approved by shareholders.

It is a breach of the code to acquire more than 20% of the voting rights in a code company except in a manner permitted by the code.

The code is based on a fundamental rule which prevents any person from becoming the holder or controller of more than 20% of the voting rights in a code company except in a manner permitted by the code. If any person already holds more than 20% then that holding cannot be increased except as permitted by the code. There are no restrictions below the 20% threshold.

The definitions of the words used in the fundamental rule are important. For example "control" is defined as having "directly or indirectly effective control of the voting right". Hence the code is built around "effective control" of the voting right and effective control may be held directly or indirectly.

The fundamental rule includes deeming provisions which have an anti-avoidance purpose and deal with situations where groups of people act jointly or in concert or join together as associates. The use of the term "associate" and the manner in which it is defined are also part of the anti-avoidance provisions. The aim is to ensure that clever structuring does not defeat the basic purpose and intent of the code.

The approach of the code in the fundamental rule is to use language that deals broadly with concept and principle and is to be given a common sense interpretation against the background of the purpose and intent of the code. If the outcome of a transaction is tested against the purpose and intent of the code then in most cases it will be relatively clear cut as to whether or not the transaction is caught by the fundamental rule.

The fundamental rule does catch and is intended to catch increases in voting power in a manner which can be regarded as involuntary.

For example a major shareholder may limit its take up of shares in a cash offer to its pro rata entitlement but still increase the percentage of the voting rights that it controls if the remainder of the cash issue is not taken up in full. Buy backs and amalgamations can also have the same outcome.

These issues are not dealt with in the code. The Takeovers Panel will address these and other examples of involuntary increases by class exemptions.

Policy issues will be addressed with these exemptions. On the one hand there is the need to facilitate normal business transactions but on the other hand the purpose and intent of the code must be preserved. These exemptions will be in place when the code comes into force on 1 July 2001.

The exceptions to the fundamental rule are a range of compliance options.

• Full and partial offers.
• Acquisition or allotment of voting securities with the approval of an ordinary resolution of the code company. (An independent adviser's report, a statement by the directors as to whether or not they support the proposal, and voting restrictions to ensure that interested parties and their associates do not vote, are required to obtain shareholder approval.)
• A 5% creep option for a person that already holds or controls more than 50% of the votes.
• Compulsory purchase provisions which are triggered at the 90% threshold.

The Code does not apply below the 20% threshold.

Full offer

A full offer is an offer for all the voting securities in the target company. It must extend to all equity securities whether voting or non-voting.

Partial offer

A partial offer is an offer to the holders of all voting securities for a specified percentage of the voting securities in the target company. The offer is not required to include other equity securities. Normal partial offer procedures, whereby shareholders may sell all or part of their holding with scaling based on the specified percentage if there are excess acceptances, are allowed.

The partial offer must be for more than 50% of the voting rights in the target company unless shareholders approve a lesser percentage. The approval process forms part of the offer procedure. The lesser percentage must be approved by shareholders who hold more voting rights in the target company than shareholders who object to the lesser percentage. For this purpose voting rights held by the bidder and its associates are disregarded.

Equal treatment of shareholders is a key component. With both full and partial offers the same terms, including price, must be offered to all security holders within a class of securities. Where there are different classes of shares an independent adviser must certify that the price is fair and reasonable as between classes.

Minimum acceptance condition

Where the bidder does not hold or control more than 50% of the voting rights the offer must be conditional on the bidder receiving sufficient acceptances to gain control of more than 50% of the voting rights in the target company. The only qualification to this rule is in the case of a partial offer for less than 50% which has been approved by shareholders.

Price

There is no restriction on the price that may be offered except that the price must be fair and reasonable between different classes of shares.

Contractual document

The offer is still a contractual document. The offeror is free to establish the terms and conditions in accordance with normal contractual principles but within the framework of the code. The rules relate to offer periods, conditions, withdrawal or lapse of an offer, variation of the offer and the payment of consideration.

The code does not set out a fixed formula to apply to all offers. It may be necessary to express the offer and its terms and conditions in a particular manner so as to obtain the full benefit of the flexibility which the code permits.

Offer procedure

The code sets out a procedure for takeover offers. This is based on the existing procedures under the Companies Amendment Act 1963.
The offeror and the target company are required to disclose a range of information. In addition, directors of the target company must obtain a report from an independent adviser on the merits of an offer. They must also recommend whether the offer should be accepted or rejected or, if they are unwilling to do so, provide a statement to that effect and the reasons.

The disclosure requirements are considerably wider than under the Companies Amendment Act to ensure that shareholders have the information they need to make an informed decision to accept or to reject the offer.

Dealings during the offer period

There are certain restrictions on the offeror during the course of a takeover offer.

The offeror cannot dispose of equity securities in the target company. The only qualification is that it may dispose of equity securities under another offer made under the code. This is to cover the position where an auction develops between competing bidders.

The offeror can acquire shares where the offer is for cash or provides a cash alternative. The possibility of acquisitions must be included in the offeror's statement and the number of securities bought must not result in the offeror breaching the 20% threshold if the offer is unsuccessful.

Defensive tactics

The code aims to ensure that shareholders have the opportunity to decide on the merits of an offer.

Defensive tactics by the directors to frustrate the offer or prevent the shareholders from having that opportunity are not permitted. However this does not prevent directors from taking steps to encourage competing bona fide offers from other parties.

Defensive tactics are permitted when:

• the action has been approved by an ordinary resolution of the target company;
• the action is permitted under a contractual obligation or when proposals approved by the directors of the target company are implemented, but the contract and proposals must have been entered into or approved before a takeover notice was received or the target company became aware that an offer was imminent; or
• if the action is taken or permitted for reasons unrelated to the offer with the prior approval of the Takeovers Panel.

Compulsory purchase

The code's compulsory purchase provisions apply when the threshold of 90% of voting rights has been reached. In a two way process the dominant owner (the holder of the 90%) has the right to buy and the remaining shareholders have a right to be bought out.

The compulsory purchase provisions are triggered by reaching 90% of the voting rights but the actual obligations to buy or sell relate to all equity securities, voting or non-voting.

Where the 90% threshold is reached as a result of a code offer the price is the offer price under the offer. Otherwise the price is a cash price specified by the dominant owner and certified as fair and reasonable by an independent adviser.

If shareholders object to the price and the number of objections exceeds the percentages referred to in the code, the price is referred to an independent person appointed by the Takeovers Panel. To avoid issues of premiums or discounts for minority holdings the code provides that the class as a whole is to be valued, with each share then being valued on a pro rata basis.

The panel has very extensive enforcement powers under the Takeovers Act. The law aims to ensure that those opposed to a particular takeover should not be able to use the code and the litigation process to derail a takeover and subvert the true purpose of the Takeovers Code.

Where the panel suspects a breach or intended breach of the code it can call a meeting to determine whether to exercise its powers.

Where a notice calling such a meeting has been given, a restraining order may be made which may remain in force until two days after the date of the meeting.

If the panel determines that it is not satisfied that the code has been complied with, it can extend the restraining order for a further 21 days and apply to the Court for a wide range of orders including orders for:

• disposal or forfeiture of shares;
• removal of voting rights;
• avoidance of agreements; and
• payment of compensation.

Interested parties may also apply for Court Orders where the panel determines that it is not satisfied that the code has been complied with. These interested parties are:

• the New Zealand Stock Exchange (if the company is listed);
• the code company concerned;
• members and affected former members of the code company;
• other parties who have made offers under the code in the six months prior to the application; and
• any other person with the leave of the Court.

However these parties may only apply if:

• the panel has consented to the application; or
• the person has asked the panel to apply to the Court and the panel has failed to do so.

Interested parties may also apply to the Court if the panel is requested to hold a meeting to determine whether the code has been complied with and if it fails to hold that meeting within 14 days. If such a meeting is held and the panel determines that it is satisfied that the code has been complied with then the interested parties have no right to apply to the Court.

The panel is in a very strong position with enforcement. It has its own powers and if it is not satisfied that a party is complying with the code it can take the matter to the Court or consent to other parties taking the matter to the Court. On the other hand the rights of the other parties to apply to the Court under the Act are very limited.

The Court may have regard to any determination or recommendation made by the panel, including any recommendation made at the request of the Court. These provisions further underline the importance of the panel's enforcement role.

The Act provides significant pecuniary penalties. A person who breaches the code or is party to a breach may be ordered to pay a fine not exceeding $500,000 in the case of a person or $5 million in the case of a body corporate.

The New Zealand Takeovers Code aims to provide commercial and sensible rules to ensure that takeovers take place in an orderly fashion. It seeks to ensure that all shareholders are treated equally and, on the basis of proper disclosure, are able to make an informed decision as to whether to accept or reject the offer.

The code is supported by compliance and enforcement powers vested in the panel under the Takeovers Act 1993.

8 November 2000