INTRODUCTION

I presented a paper at a seminar similar to this one over eight years ago. Before that seminar the Takeovers Panel Advisory Committee had released the draft Takeovers Code. I noted in my paper that: "The need for a review of takeover law was the subject of a report from the Securities Commission in 1983." Following the 1983 report we had almost twenty years of listening to the pro-Code and anti-Code factions present and re-present their arguments ad infinitum.

But even in New Zealand decisions are eventually made. We now have a Code which has been operating since 1 July 2001. It has generally been well received with some very positive and supportive comments about its operation even from former opponents of the Code.

The Code is still new to many, consequently I will in this seminar traverse its key features and also talk about some of the issues that have arisen to date.

TAKEOVERS ACT

Firstly I should mention that the Takeovers Act 1993 under which the Takeovers Panel formulated the Code, is being amended by the Securities Markets and Institutions Bill. Most of the changes are of a technical nature particularly those that extend and clarify the Panel's powers.

From a policy perspective there is one significant change. To date the power to formulate and amend the Code has rested with the Panel with the Minister having the power to approve or not approve or defer its adoption. The new Bill now provides for the Minister to formulate any amendments or changes to the Code or any new Code subject to consultation with the Panel. The Panel retains the function of keeping under review the law related to takeovers and recommending to the Minister any changes to the law that it considers necessary.

The co-ordination of business law between Australia and New Zealand is still required under the Bill to be taken into account in any review of the Code. As part of the process of co-ordination our Panel now has a new member Dennis Byrne who is a member of the Australian Takeovers Panel and I have been appointed to the Australian Takeovers Panel. I have no doubt that personal contacts of this nature will be of benefit to the co-ordination process.

TYPE OF CODE

I would like to make a few comments on the overall nature of the Code. The New Zealand and Australian Takeover Codes are sometimes categorised as an enhanced participation regime, rather than a mandatory offer regime, being designed to ensure that all shareholders participate in the takeover process. Hence the threshold of 20% cannot be exceeded except in compliance with the Code. The threshold is at a level which is regarded as clearly below the level at which effective control of a company will pass.

This is in contrast to the true mandatory offer regime under the City Code in London. With this regime the threshold tends to be set at a higher level at which effective control may well pass. Under this regime it is not an offence to exceed the threshold which is the case with the New Zealand Code. However if the threshold is exceeded then it triggers the requirement for an offer under the Code.

There are of course similarities in the outcome of both regimes. But there must be no confusion in the New Zealand marketplace about the essential difference which is that it is an offence to exceed the threshold except in compliance with the Code. There is of course no problem with existing holdings in excess of 20%.

Broadly the Code is designed to ensure that all shareholders take part in the takeover process, that all shareholders are treated equally, that the process is conducted in an orderly fashion and all information relevant to the takeover is disclosed.

WHO DOES THE CODE APPLY TO

The Code applies only to companies and not for example to listed trusts. Companies are defined as "companies registered in New Zealand". The New Zealand companies that are caught are those that:

1. are a party to a listing agreement with the Stock Exchange; or

2. were a party to a listing agreement during the previous twelve months; or

3. have 50 or more shareholders and $20 million or more of assets.

These requirements are contained in the Takeovers Act and the Panel has no jurisdiction to amend them. Some non-listed companies who are caught by the Code believe that the policy and objectives of the Code were not intended to apply to them. Unfortunately it is not the role of the Panel to re-write the definitions contained in the Act and consequently it is not able to use its exemption powers for that purpose.

TRANSITIONAL PROVISIONS

The transitional provisions in section 23 of the Act have already been considered in a number of enforcement situations. Subclause (a) is quite straightforward in providing that existing holdings in excess of the 20% threshold are permitted. Subclause (b) is the more important provision which seeks to preserve rights and obligations which predate 1 July 2001. Acquisitions which are exempted by subclause (b) from compliance with the Code are those which arise:

"… from the performance of a contractual obligation incurred or the exercise of a right acquired, before the date on which the approved Takeovers Code comes into force …"

This provision will continue to be important as there may well be some long term contractual obligations where implementation arises some considerable period of time after 1 July 2001. Issues will arise with options and convertible securities but there is a distinction between the date the option or convertible security was granted as opposed to the date it was acquired by the person seeking allotment of the voting security.

The Panel will monitor carefully transactions which are claimed to fall within the transitional provisions, bearing in mind the purpose and intent of the section which I believe is relatively straightforward.

KEY FEATURES

I now turn to some of the key features of the Code.

Fundamental Rule

The fundamental rule is built around the holding or controlling of voting rights. Except for existing holdings no person may become the holder or controller of more than 20% of the voting rights in a Code company except in a manner permitted by the Code. Existing holdings cannot be further increased except as permitted by the Code. There are no restrictions below the 20% threshold. Consequently the Code will not prevent the issuing of options and convertible securities which do not carry voting rights, but the conversion of those securities into securities which carry voting rights will be subject to the Code.

The word "control" is defined as having "directly or indirectly effective control of the voting right". The Code is therefore built around the concept of "effective control" of the voting right and effective control may be held directly or indirectly. There are of course anti-avoidance purposes inherent in this approach. Furthermore subclause 2 of the fundamental rule expands the anti-avoidance process further. There are deeming provisions to deal with situations where groups of people act jointly or in concert or join together as associates in the holding or controlling of voting rights.

The term "associate" and its definition is another part of the anti-avoidance network. The definition of "associate", and indeed the definitions generally in the Code, are not based on a black letter law approach. Rather they deal more broadly with concept and principle which requires a common sense interpretation against the background of the purpose and intent of the Code.

Some criticism of the Code has been based on a misunderstanding of the way the fundamental rule works. For example, it has been suggested that if a group of institutions decide, after consultation, to vote against a proposal they may breach the fundamental rule. This is not correct. The fundamental rule is concerned with whether the voting rights which a

person holds or controls are increased. The Code does not inhibit the ability of shareholders to exercise as they think fit the votes that they hold or control and certainly does not prevent discussion, consultation, co-operation and agreement between shareholders in the exercise of those voting rights.

Compliance options

The Code specifies the various ways in which increases in voting rights beyond the 20% threshold may occur.

Code offers

The Code provides for not only a full offer for all the voting securities in the target company but also for partial offers. These are offers to holders of all voting securities for a specified percentage of the voting securities in the target company. The partial offer procedure allows shareholders to sell all or part of their holding with scaling based on the specified percentage if there are excess acceptances.

Shareholder approval

The Code permits the acquisition or allotment of voting rights with the approval of an ordinary resolution of the Code company in certain circumstances.

Creep

The Code contains a 5% creep provision for a person that already holds or controls more than 50% of the votes. This 5% is 5% of the total voting rights in the company, not 5% of the shareholder's voting rights.

Compulsory Acquisition

Finally, the compulsory acquisition provisions are triggered at the 90% threshold.

Equal treatment

Equal treatment of shareholders is a key component of the Code. Consequently with full and partial offers the same terms, including price, must be offered to all securityholders. Where there are different classes of shares the price is to be fair and reasonable as between classes and an independent adviser must certify to that effect.

Minimum acceptance condition

With a takeover offer, where the bidder does not already hold or control more than 50% of the voting rights, the offer must be conditional on the bidder receiving acceptances that will give the bidder 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 where the offer is for less than 50% and shareholders have approved that lesser percentage. In obtaining shareholder approval voting rights held by the bidder and its associates are to be disregarded. I emphasise that the minimum acceptance condition is a fundamental requirement of the Code and I can foresee no circumstances in which exemptions from this requirement would be granted.

Pricing

There is no restriction on the price that may be offered under a takeover offer apart from the requirement that the price be fair and reasonable as between different classes of shares. This contrasts with the Australian position where the price must be not less than the highest price paid during the preceding four months.

The Panel considered that the overall structure of the Code, and in particular the minimum acceptance condition (the need to bid for control), enabled the omission of the pricing rule contained in the Australian Code.

Pricing rules can be very distortionary in their effect on the operation of the takeovers market. Differential pricing is, of course, not permitted. The same price must be offered excepting only where there are different classes of shares, in which event an independent adviser must certify that the price is fair and reasonable as between those different classes.

Defensive tactics

The Code sets out to ensure that shareholders have the opportunity to decide on the merits of an offer and hence defensive tactics by the directors aimed at frustrating the offer or preventing 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. Exceptions to the prohibition of defensive tactics are three, namely:

1. The action has been approved by an ordinary resolution of the target company;

2. The action is permitted under a contractual obligation or implements proposals approved by the directors of the target company. However these obligations or 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;

3. If the action is taken or permitted for reasons unrelated to the offer with the prior approval of the Panel.

PROCESS AND PROCEDURE

Takeover offers

I emphasise that a takeover offer is still a contractual document. The offeror is free to establish the terms and conditions of the offer in accordance with normal contractual principles but within the framework provided by the Code.

There are rules relating to offer periods, conditions, withdrawal or lapse of an offer, variation of the offer and payment of the consideration. Advisers need to familiarise themselves with these rules so that they establish terms and conditions and procedures in the offer document that can operate in a normal contractual manner within these rules. The Code does not set out to provide 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.

A full offer must extend to all other equity securities whether voting or non-voting. There is no requirement for a partial offer to include securities other than voting securities.

Conditions can be included in an offer but they must not depend on the judgement of the offeror or any associates of the offeror, and the fulfilment of the condition must not be under the power or control of the offeror or any associates. Clearly the conditions must not, in effect, be a means of turning the contract formed by acceptance of the offer into an option.

The procedures include requirements for the offeror and the target company to disclose a range of information. The requirement for the target company directors to obtain an independent adviser's report on the merits of the offer is particularly important. The directors must also make a recommendation as to whether the offer should be accepted or rejected or if they are unwilling to do so then they must provide a statement to that effect and the reasons. The intention is to ensure that shareholders have the information necessary to make an informed decision as to whether to accept or reject the offer.

Shareholder approval

In the case of shareholder meetings to approve the acquisition or allotment of voting rights the procedures in the Code also aim to ensure that shareholders have the information necessary to make an informed decision as to whether to support or oppose the resolution being put before the meeting. As with a takeover offer a report from an independent adviser on the merits of the proposal must be obtained and the directors have similar obligations in relation to recommending whether the resolution should be supported or opposed. There are also voting restrictions to ensure that interested parties and their associates do not vote.

Shareholder approval is not an alternative to a takeover offer. It is designed to facilitate specific transactions where the identities of the seller and the allottees or acquirers are disclosed and full details are provided of the transaction and the reasons for it. For example it enables the introduction of a shareholder who may be receiving more than 20% and less than 50% of the voting rights in the company.

Compulsory acquisition

The compulsory acquisition provisions are triggered when the threshold of 90% of the voting rights has been reached. It is a two-way process whereby not only does the dominant owner (the holder of the 90%) have the right to buy but the remaining shareholders have the right to be bought out. The actual obligation to buy or sell relates to all equity securities whether voting or non-voting.

When the 90% threshold is reached as a result of a Code offer then the price is the offer price under the offer. Otherwise there is a process for the fixing of a fair and reasonable price which involves, if necessary, an expert determination by an independent person appointed by the Panel.

To avoid issues of premiums or discounts for minority holdings the Code provides that a class of securities as a whole is to be valued, each security then being valued on a pro rata basis.

Dealings during the period of a takeover offer

The offeror is prevented from disposing of equity securities in the target company during the course of a takeover offer. The only qualification is that it may dispose of equity securities under another offer that is made under the Code. This is of course to cover the position where an auction effectively develops between the bidders.

On the purchasing side the offeror can acquire shares where the offer is for cash or provides a cash alternative. The possibility of acquisitions being made must be included in the offeror's statement and the number of securities being purchased must not, if the bid is unsuccessful, result in the offeror having increased its voting power beyond the 20% threshold.

PANEL ACTIVITIES

The Panel has a range of obligations and powers under the Takeovers Act and the Code which I will now outline.

Review of takeover documents

The Code requires copies of most documents to be sent to the Panel. While the Panel is not obliged to vet those documents, as a matter of practice it does review them for compliance with the Code. In the case of non-compliance it makes a decision on each occasion as to what action needs to be taken. All documents should be forwarded promptly to the Panel as in some cases it may be possible for errors and omissions to be rectified before the offer is sent. The same process applies with documents relating to shareholder meetings called in compliance with the Code.

Not all advisers have paid sufficient attention to the specific requirements of the schedules detailing information required in takeovers. Accurate disclosure in accordance with the Code is important. It would be unfortunate indeed if an offer had to be withdrawn and a new offer made simply because of a failure to make full and proper disclosure. This applies to both the offeror's statement and the target company's statement. The last edition of Code Word highlighted the importance of disclosure by all directors of the target company. The fact that there may be a group of independent directors who are managing the process for the target company does not absolve the other directors from ensuring that they make full disclosure of all information which pertains to them and which under the Code is required to be disclosed.

Independent advisers

The appointment of independent advisers is a task which is taken very seriously by the Panel. The key requirement is that the independent adviser must be, and must be seen to be, independent. To assist applications for appointment the Panel has published procedures on its website and also in Code Word. Some delays and added cost are still resulting from incomplete applications. Here again I would encourage advisers to look very carefully at the Panel's requirements.

The independent adviser's report is of fundamental importance. The requirement is for a report on the merits of the offer. The word "merits" is not defined. Clearly it has been chosen because of the breadth of its concept. It is not just a valuation. Different issues will arise with independent reports for shareholder approval of acquisitions or allotments as opposed to the report on a takeover offer. There will also be different issues for full and partial offers.

Reports may be required not only under the Code but also under the listing rules of the Stock Exchange. Generally the requirements of the Code and the listing rules are not the same although the reports may contain many common elements. A practice note on the Panel's website highlights the requirement that the question of the merits of a proposal or offer for the purposes of the Code needs to be dealt with quite separately.

In addition, while the target company directors will expect their independent advisers to comply strictly with the requirements of the Code, they are also obliged to ensure that the advisers in fact do so.

Exemptions

One of the most important activities of the Panel is dealing with exemptions. There are two types of exemptions. The first are specific exemptions which exempt a person or persons from compliance with any particular provision or provisions of the Code. The second are class exemptions which exempt any class of person, transaction or offer from compliance with any particular provision of the Code.

The Panel recognises that there may from time to time be technical difficulties in complying with the Code necessitating exemptions but the objectives of the Code must not be compromised. Where necessary exemptions will be subject to conditions that ensure that the underlying purpose and intent of the Code are fulfilled. The Act emphasises the importance of this policy by requiring the Panel to give reasons for granting an exemption which must include why it is appropriate that the exemption is granted and how the exemption is consistent with the objectives of the Code.

Class exemptions provide a standard form of exemption to apply to common classes of transactions thereby reducing significantly the need for specific exemptions. A range of class exemptions came into force on 1 July 2001. These deal with buy-backs, allotments, lenders and receivers, proxies and corporate representatives, sharebrokers, underwriters, executors and trustees, nominee companies and bare trustees and intra-group transfers. Subsequently a class exemption was granted in relation to Trustee Companies.

As with specific exemptions, the terms and conditions aim to ensure that the underlying purpose and intent of the Code are fulfilled. For example, with buy-backs and allotments the Code permits in certain circumstances breaches of the fundamental rule which are involuntary in nature but on the condition that the excess voting shares are sold within six months and that during that period the excess votes are not exercised. Exemptions granted by the Panel are on our website and referred to in Code Word.

The comments that I have made about the appointment of independent advisers also apply to exemptions. Delay and excess cost will be obviated if full and complete disclosure of all the circumstances is made at the outset. Also the process will take time as information is gathered and reports are prepared and then considered by the Panel. Hence advisers should consult with the Panel executive at an early stage. Exemptions have covered a range of matters. For example:

1. Overseas takeovers which affect voting control in a Code company in New Zealand in cases where the New Zealand company is an incidental part of a much larger transaction and the change in voting control is a consequence of, and not the purpose of, the transaction.

2. Complicated restructurings as in the case of the Fisher & Paykel reconstruction.

3. A merger undertaken by scheme of arrangement by Baycorp and Data Advantage.

4. A number of issues of securities including convertibles where particular circumstances, such as an underwrite by a major shareholder, have meant that the strict requirements of the Code cannot be complied with.

5. A takeover involving a scrip issue with difficulties caused by a number of small shareholdings, including overseas shareholdings.

In all cases the Panel has granted exemptions only where the nature and terms of the transaction and the conditions imposed by the Panel ensure that the objectives and purpose of the Code are not undermined.

The Panel will resist granting exemptions relating to the various timing requirements of the Code. With a contested takeover it is important that there is a level playing field where the contestants know and can work within the requirements of the Code. The exemption process is not to be used as a tactical weapon in a contested takeover.

Finally, in relation to exemptions I should remind you that an exemption has been granted by the Securities Commission under the Securities Act to facilitate takeovers where the consideration offered is in the form of scrip. The exemption is limited in nature but enables listed companies to issue scrip with a simplified form of investment statement and prospectus.

Enforcement

The Panel has very extensive enforcement powers under the Takeovers Act. The legislature has clearly been concerned that those opposed to a particular takeover should not be able to use the Code and the litigation process to effectively derail a takeover and subvert the true purpose of the Code.

Where the Panel suspects a breach or intended breach of the Code it can call a meeting under section 32 of the Act 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 for a period expiring on the second day after the date for which the meeting is convened.

If the Panel determines that it is not satisfied that the Code is being complied with, it can extend the restraining order for a further 21 days and can apply to the Court for a wide range of orders including orders for the disposal or forfeiture of shares, removal of voting rights, avoidance of agreements and payment of compensation.

The Act names interested parties who may also apply for orders from the court where the Panel makes a determination that it is not satisfied that the Code has been complied with. These include the Stock Exchange (if the Code company is listed), the Code company concerned and members and affected former members of the Code company. However these parties may only apply if the Panel has consented to the application or the person concerned has requested the Panel to make an application to the Court and the Panel has failed to do so.

The same interested parties may also apply to the court where a request has been made to the Panel to hold a meeting to determine whether to exercise its powers and the Panel does not hold a meeting and make a determination within 14 days. If such a meeting is held and the Panel determines that it is satisfied that the Code is being complied with then those parties have no right to apply to the Court.

It can be seen therefore that 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 has the power to take the matter to court or consent to other parties taking the matter to the Court. On the other hand the rights of other parties to apply to the Court under the Act are very limited.

Under the Act the Court may have regard to any determination made by the Panel. And in determining the type of order to be made, the court may have regard to any Panel recommendation, including any recommendation that may be made at the request of the Court. These provisions underline the importance of the Panel's role in enforcement.

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

The contest for Montana is, of course, the best example to date of the use of the Panel's powers. Those who chose 1 July 2001 as the date for the commencement of the Code had not appreciated that it was a Sunday. It was at 9.30am on that Sunday that a division of the Panel held its first meeting in connection with the Montana matter. Later that day the first notice calling a meeting under the enforcement provisions was given, accompanied by the first restraining order. Our first press release was made at 1am on Monday 2 July. It was certainly a demanding start for the Panel. On the other hand it was a very clear signal to the market that the Panel was up and operating and willing to exercise its powers outside normal working hours where necessary.

Fees

Under the Takeovers (Fees) Regulations 2001 the Panel can charge fees for approvals and exemptions. Details of these fees are on our website. The power to charge fees extends to the Panel's enforcement powers under section 32. The person against whom the Panel has made an adverse determination under section 32 and also a person who requests the Panel to hold a meeting pursuant to section 35 can be charged fees.

Market liaison

A key aspect of the Panel's liaison with the market is its website and its publication Code Word which is sent to interested parties from time to time. You are encouraged to visit the website and you can request to be placed on the mailing list for Code Word. On the website you will find the Takeovers Act, Takeovers Code and the class exemptions. You will also find copies of the other exemptions granted by the Panel and the policy documents covering the receipt of documents, the approval of independent advisers, the appointment of experts and applications for exemptions. Practice notes and comments on issues that have arisen under the Code are also on the website and in Code Word.

Secretariat

The Panel's executive and administrative support is provided by the Securities Commission under an agreement entered into between the Panel and the Commission. However the Panel is a separate legal entity created under the Takeovers Act and there is no delegation by the Panel of any of its decision-making powers to the Securities Commission. The Panel's secretariat although provided by the Securities Commission operates quite separately from the Commission and acts in accordance with the directions of the Panel, its Chairman and divisional chairmen.

CONCLUSION

The Panel has now taken its place as part of the regulatory framework for the securities market in New Zealand. The other key regulatory bodies are, of course, the Securities Commission and the New Zealand Stock Exchange. You will all be aware that the role of the Securities Commission is being extended by the government and that there are significant changes taking place with the Stock Exchange.

We hope that both the local and international commentators will now cease to see New Zealand as the wild west of the world's securities markets and will see that we are developing a sensible regulatory regime; a regime that will seek further co-ordination with Australia but which will, nevertheless, always take into account the particular requirements of our own market.