The Takeovers Code has been a long time coming. Its commencement date of 1 July 2001 was almost 10 years after the original Takeovers Panel Advisory Committee was appointed which followed almost 10 years of intensive debate. In contrast to that lengthy build-up however, the commencement date of 1 July required literally an instantaneous reaction by the Panel to the operation of the takeovers market.

1 July was a Sunday. At 9.30am on that Sunday a division of the Panel held its first meeting in connection with the contested bid for Montana. Later that day the first notice calling a meeting under the enforcement provisions was given accompanied by the first restraining order. 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.

Quite apart from the requirements of the Montana contest there has been a steady stream of commercial activity requiring Panel involvement. To give you a feel for the level of activity I list the following:

Enforcement under Section 32 of the Act
There have been 3 meetings under this section involving two adverse decisions.

Restraining Orders
5 restraining orders have been issued.

Exemptions
There have been 17 applications for individual exemptions, 4 of which have been approved.

Takeover Notices
7 takeover notices under the Code have been issued.

Independent Advisers
15 independent advisers have been approved.

The focus of the market is now on the requirements of the Code and the role of the Panel. I propose this morning to give an overview of the Code and its requirements and the functions of the Panel.

NATURE OF THE CODE
I would like to make a few comments on the overall nature of the Code. It is not a mandatory offer regime as exists under the City Code in London. I still see articles and comment that "if a person acquires more than 20% of a code company then that person must make a bid for the remaining shares in the company". This is not correct. It is an offence to acquire more than 20% of the votes in a code company except in a manner permitted by the Code. It is a threshold beyond which you cannot pass except in compliance with the Code. There is, of course, no problem with existing holdings in excess of 20%.

The New Zealand and Australian takeover codes are sometimes characterised as an enhanced participation regime, rather than a mandatory offer regime, designed to ensure that all shareholders participate in the takeover process. Consequently, to acquire more than 20% of the voting securities in a code company a person needs to comply with the Code. This means, in broad terms, an offer to all shareholders or an acquisition with shareholder approval. The Australian and New Zealand Codes then build around these requirements the pause and publicity provisions which were the basis of the old Companies Amendment Act 1963 in New Zealand.

CODE COMPANY
The Code applies to companies that fall within the definition of a "code company". It applies only to companies and not, for example, to listed trusts. Companies are defined as "companies registered in New Zealand". New Zealand registered companies that fall within the definition 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 12 months; or
3. have 50 or more shareholders and $20 million or more of assets.

The definition of a code company simply repeats the definition contained in the Takeovers Act. The Panel has no jurisdiction to amend that definition. The definition may catch some non-listed companies which do not believe that it was intended that the policy and objectives of the Code should apply to them. Unfortunately it is not the role of the Panel to re-write the definition contained in the Act and consequently it is not able to use the exemption power for that purpose.

TRANSITIONAL PROVISIONS
The transitional provisions contained 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) however is the more important provision which seeks to preserve rights and obligations which pre-date 1 July 2001. Acquisitions may proceed without the need to comply with the Code where, and I quote:

"The acquisition arises 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. 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 turn now to some of the key features of the Code.

Fundamental Rule
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.

In applying the fundamental rule it is important to consider closely various definitions. For example the word "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. As you will see, there are anti-avoidance purposes inherent in the definition of "control".

In addition 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.

Some of these provisions at first glance appear somewhat complex. On the other hand corporate groupings with upstream and downstream structuring will be focussed upon by advisers in an effort to see whether the requirements of the Code can be circumvented. The Panel has sought by the careful use of definitions and deeming provisions to ensure that the basic purpose and intent of the Code is not defeated by clever structuring.

The term "associate" and its definition is a further part of the anti-avoidance network. The definition of the term "associate" and indeed the definitions generally contained in the Code are not based on a black letter law approach but deal more broadly with concept and principle which accordingly requires a commonsense interpretation against the background of the purpose and intent of the Code.

There has been some criticism of the Code 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 incorrect. The fundamental rule is concerned with whether there is an increase in the voting rights which a person holds or controls. The Code will not inhibit shareholders' ability to exercise as they think fit the votes that they hold or control and will certainly not prevent discussion, consultation, co-operation and agreement between shareholders in exercising their individual voting rights.

Compliance Options
There are compliance options in the Code which allow increases in voting rights beyond the 20% threshold. Apart from full and partial offers which comply with the requirements of the Code there are provisions permitting acquisition or allotment of voting rights with the approval of an ordinary resolution of the code company. The process for obtaining shareholders' approval requires 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.

The compliance options also include a 5% creep for a person that already holds or controls more than 50% of the votes. This 5% is not 5% of the shareholders' voting rights but 5% of the total voting rights in the company.

Finally there are the compulsory purchase provisions which are triggered at the 90% threshold.

The Code does not apply below the 20% threshold.

Takeover offers
The following are brief comments about the rules which apply to takeover offers under the Code:

Full and partial offers
A full offer is an offer for all the voting securities in the target company and must extend to all other equity securities whether voting or non-voting.

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. There is no requirement for the offer to include other equity securities. Unlike Australia, the Code allows the 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.

A 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
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 security holders. Where there are different classes of shares the price must be fair and reasonable as between classes and an independent adviser must certify to that effect.

Minimum acceptance condition
Where the bidder does not already hold or control more than 50% of the voting rights the Code requires that the offer must be conditional on the bidder receiving acceptances for voting securities that will result in the bidder controlling more than 50% of the voting rights in the target company. The only qualification to this rule is the case of a partial offer where the offer is for less than 50% and the requirement of shareholder approval of that lesser percentage has been fulfilled. I emphasise that this is a fundamental requirement of the Code and I can foresee no circumstances in which an exemption from this requirement would be granted.

Price
There is no restriction on the price that may be offered apart from the requirement that the price be fair and reasonable as between different classes of shares. This is in contrast to the position in Australia where the price must not be less than the highest price paid during the preceding 4 months. The Panel considered that the overall structure of the Code, and in particular the inclusion of the minimum acceptance condition (i.e. 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 for a security so that different prices will only arise where there are different classes of shares. In this event an independent adviser must certify that the price is fair and reasonable as between those different classes.

Contractual document
I emphasise that the 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 in relation to offer periods, conditions, withdrawal or lapse of an offer, variation of the offer and the payment of the consideration.

Advisers will need to familiarise themselves with these rules so that they establish terms and conditions and procedures in the offer document which 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.

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.

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

Offer procedures
The Code sets out a procedure for takeover offers which is based on the requirements of the old Companies Amendment Act 1993. These procedures include requirements for the offeror and the target company to disclose a range of information. Of particular importance is the requirement for the target company directors to obtain a report from an independent adviser on the merits of an offer. They 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 disclosure requirements are considerably wider than under the Companies Amendment Act and ensure that shareholders have the information necessary to make an informed decision as to whether to accept or reject the offer.

Dealings during the offer period
There are certain restrictions on the offeror during the course of a takeover offer. The offeror is prevented from disposing of equity securities in the target company. 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 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 that are purchased must not result in the offeror breaching the 20% threshold. If a bid is unsuccessful the offeror must not be in a position where the acquisitions have increased its voting power beyond the 20% threshold.

Defensive tactics
On the other hand, 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. The Code however makes it clear that this does not prevent directors from taking steps to encourage competing bona fide offers from other parties. The exceptions to the prohibition of defensive tactics are 3, 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 the implementation of proposals approved by the directors of the target company. However the contractual obligation 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;

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

Compulsory purchase
To complete my overview of the Code I refer briefly now to the compulsory purchase provisions. These apply when the threshold of 90% of 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 a right to be bought out. The compulsory purchase provisions are triggered by reaching 90% of the voting rights but the actual obligation to buy or sell relates to all equity securities whether voting or non-voting.

Where the 90% threshold is reached as a result of a Code offer then the price is the offer price under the offer. Otherwise the cash price is to be specified by the dominant owner which must be a sum certified as fair and reasonable by an independent adviser. Shareholders can object to the price and if the number of objections exceed the percentages referred to in the Code then the price is referred for expert determination to an independent person appointed by the Panel. To avoid issues of premiums or discounts for minority holdings, the Code provides that the class as a whole is to be valued, each share then being valued on a pro rata basis.

ROLE OF THE PANEL
Now that the Takeovers Code is in force those who are active in the takeovers market need to focus on the provisions of the Takeovers Act under which the Panel has a range of powers and obligations.

Exemptions
Section 45 of the Takeovers Act gives the Panel wide powers to grant exemptions from the Code. There are two types of exemptions. The first type are specific exemptions which exempt a person or persons from compliance with any particular provision or provisions of the Code. The second type are class exemptions which exempt any class of person, transactions or offers from compliance with any particular provision or provisions of the Code.

It is recognised that from time to time there may be technical difficulties in complying with the strict requirements of the Code necessitating the need for specific exemptions. However the objectives of the Code must not be compromised by granting an exemption and where necessary exemptions will be subject to conditions which ensure that the underlying purpose and intent of the Code are fulfilled. The requirements of section 45 emphasise 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 aim to provide a standard form of exemption to apply to common classes of transactions thereby reducing significantly the need for applications for specific exemptions. A range of class exemptions came into force on 1 July 2001.

They deal with buybacks, allotments, lenders and receivers, proxies and corporate representatives, sharebrokers, underwriters, executors and trustees, nominee companies and bare trustees and intra-group transfers. As with specific exemptions the terms and conditions are designed to ensure that the underlying purpose and intent of the Code are fulfilled. For example with buybacks and allotments the Code permits in certain circumstances breaches of the fundamental rule which are involuntary in nature but on condition that the excess voting shares are sold within six months and that during that period the excess votes are not exercised.

Those seeking to rely on the class exemptions will need to study carefully their terms and conditions as in some cases the particular requirements of a transaction may still necessitate a specific exemption.

There is one further exemption which is relevant to takeovers which is in fact not granted by the Takeovers Panel but by the Securities Commission under the Securities Act. This is an exemption to facilitate takeovers where the consideration offered is in the form of scrip. The exemption applies to equity or debt securities that are issued by a listed company and have been quoted on the New Zealand Stock Exchange or belong to a class of equity or debt securities that has been quoted on the New Zealand Stock Exchange for at least 12 months before the making of the offer. With an offer that complies with the Code the prospectus and investment statement requirements of the Securities Act in relation to these securities are very much reduced. The exemption also contains some modifications to the prospectus and investment statement requirements for other securities that fall outside the definition of "quoted securities".

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 for the purpose of determining 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 , the Panel 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 alternatively it may 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 Act also expressly provides that 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 recommendation made by the Panel including any recommendation that may be made at the request of the Court. These provisions further underline the importance of the Panel's role in enforcement.

As well as the various orders that the Court may make 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.

Procedures
To assist the market in its dealings with the Panel we have a website and a publication named "Code Word" which is sent to interested parties from time to time. On the website you will find the Takeovers Act, the Takeovers Code and the class exemptions. You will also find policy documents covering the receipt of takeover documents, the approval of independent advisers, the appointment of experts and applications for exemptions. Consequently if you need to apply to the Panel for exemptions or approvals you will find the Panel's requirements in the policy documents.

Under the Takeovers (Fees) Regulations Act 2001 the Panel can charge fees for applications for approvals and exemptions. Details of these fees are also on the website. The power to charge fees extends to the Panel's enforcement powers under section 32. A 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 also be charged fees as detailed in the regulations.

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.

[CONCLUSION]
The Takeovers Code was actually gazetted back in October 2000. Between that date and the commencement date of 1 July 2001 the Panel moved from its initial role of formulating the Code to preparing for its operational role. We developed our procedures and processes and in particular issued our class exemptions. It is just as well we did so as right from day one the Panel has been called upon to undertake its enforcement role. We aim to act quickly and decisively, being driven by the purpose and policy of the Code and not by legal niceties.

Procedures are in place to deal with exemption and approval applications. However our ability to process these applications efficiently will depend on applicants familiarising themselves with our requirements and providing the Panel with the information that it requires.

Where we can provide useful guidelines and other information to the market we will do so through Code Word and our website and, of course, our secretariat provided by the Securities Commission will do its best to assist.