Rank Group Investments Limited
Published 13 February 2006
BEFORE THE TAKEOVERS PANEL
IN THE MATTER OF
the Takeovers Act 1993 and the Takeovers Code
IN THE MATTER OF
a meeting held under section 32 of the Takeovers Act 1993 to determine whether Rank Group Investments Limited has not acted, or is not acting, or intends not to act in compliance with the Takeovers Code by including in the terms of its proposed offer for all the shares in Carter Holt Harvey Limited it does not already hold a provision that a component of the consideration would be payable only if by the close of the seventh business day after the date of the offer it had received valid acceptances that, when taken together with voting securities it already held or controlled, conferred more than 90% of the voting rights in Carter Holt Harvey Limited.
13 February 2006 at Auckland
J C King (Chairman)
A Harmos, G Horton, K Helem and N Starrenburg, representing Rank Group Investments Limited;
M M Hemphill and G J Miller (from Panel Executive)
15 February 2006
 Carter Holt Harvey Limited ("CHH") is a company whose shares are listed on the New Zealand Stock Exchange and as such is a code company for the purposes of the Takeovers Code ("the Code").
 Rank Group Investments Limited ("Rank"), a company incorporated in New Zealand, currently holds 85.7% of the voting securities in CHH as a result of a takeover offer made on 14 September 2005 which closed on 27 January 2006.
 On 3 February 2006 Rank gave notice under rule 41 of the Code of its intention to make a further full offer for the voting securities of CHH not already held by it.
 As required by rule 41(b) of the Code the notice of intention to make a takeover offer (the "takeover notice") was accompanied by details of the terms and conditions of the proposed offer. The terms and conditions of the proposed offer were given in the form of a draft offer document (the "draft offer document").
 The draft offer document states that the consideration payable under the offer would be as follows:
The consideration offered by Rank for each CHH share is, subject to the requirements set out in this paragraph 2.1, $2.75 in cash, comprising:
(a) a base consideration of $2.70 in cash per CHH Share ("Base Consideration"); plus
(b) an additional payment of $0.05 in cash per CHH Share ("Additional Consideration").
The additional consideration will be paid only if, by the end of the day that is seven Business Days after the date of this Offer, such day being [insert date] February 2006 ("Additional Consideration Date"), Rank has received valid acceptances of this Offer in respect of CHH Shares that, when aggregated with Rank's existing ownership of CHH Shares (as at the date of this Offer) will result in Rank holding or controlling 90% of more of the total number of CHH Shares on issue. ….
 The draft offer document also states that:
If the Additional Consideration becomes payable in accordance with paragraph 2.1, the Additional Consideration will be paid to each Carter Holt Harvey shareholder that accepts this Offer (each, an "accepting Carter Holt Harvey shareholder"), regardless of when they accept this Offer.
 The proposed offer is to be subject to a 90% minimum acceptance condition that is not expressed to be waiveable by the offeror.
Initial actions by the Panel
 The Panel received a copy of Rank's takeover notice and draft offer document on 3 February 2006 as required by rule 47 of the Code. Upon reviewing the draft offer document the Panel was concerned as to whether the terms of Rank's proposed offer, and in particular the provision that part of the consideration would be payable only if, through acceptances of the offer, Rank would become the holder of controller of more than 90% of the voting rights in CHH by the end of the seventh business day after the date of the offer, would comply with the requirement in rule 24 of the Code that an offer period be for a minimum of 30 days.
 Rule 24(1) and (2) provide:
(1) An offer must specify the period for which it will remain open and, subject to rules 25(4) and 26(1), must remain open for that period.
(2) The offer period must -
(a) commence with the date of the offer; and
(b) be not shorter than 30 days, and not longer than 90 days.
 On 6 February 2006 the Panel wrote to Harmos Horton Lusk, legal advisers to Rank, seeking urgent comments on the Code compliance of Rank's offer.
 On 8 February 2006 the Panel met to consider the terms of Rank's proposed offer and the comments provided by Rank's legal advisers.
 At its meeting on 8 February 2006, the Panel passed the following resolution:
"On or about 3 February 2006 Rank notified its intention to make a full takeover offer for all the voting securities of CHH not already held by Rank.
The draft offer document which accompanied the takeover notice stated that the consideration offered by Rank for each CHH share was, subject to certain other requirements set out in the draft offer document, $2.75 in cash, comprising:
(a) a base consideration of $2.70 ("the base consideration"); plus
(b) an additional payment of $0.05 ("the additional consideration").
The draft offer document stated that the additional consideration would become payable only if, by the close of the seventh business day after the date of the offer, Rank had received valid acceptances that, when taken together with voting securities already held or controlled by Rank, conferred more than 90% of the voting rights in CHH.
The draft offer document stated that the offer was subject to a 90% minimum acceptance condition that was not expressed to be waivable by Rank.
The Panel considers that the terms of Rank's proposed offer may not comply with rule 24 of the Code because the limited terms of the proposed offer in respect of the full price may have the effect of shortening the offer period for the offer at $2.75 from 30 days as required by rule 24(2) of the Code, to seven business days. Accordingly, the Panel considers that Rank may not have acted or may not be acting or may intend not to act in compliance with the Code.
The Panel has decided not to issue any restraining orders because Rank is unable to send its proposed offer to shareholders until 17 February 2006."
 On 9 February 2006 the Panel gave notice of its intention to hold a meeting under section 32 of the Takeovers Act 1993 (the "Act") on Monday 13 February 2005 in Auckland.
 Rank was requested to provide written submissions to the Panel by 5 p.m. on Friday 10 February 2006. Rank provided its written submissions as requested. At the Panel's meeting on 13 February 2006 Rank's legal advisers spoke to their written submissions.
 CHH was given the opportunity to attend the Panel's meeting but decided not to do so. CHH made no submissions on the issues before the Panel.
 Rank submitted that the term of the offer relating to the payment of an additional consideration component if Rank becomes the dominant owner of CHH through acceptances within seven business days of the offer date does not breach rule 24.
 Rank argued that the seven day period for satisfaction of the condition for payment of the additional consideration component is not a limitation of the offer period but a reference point for a variable pricing mechanism.
 Rank submitted that the time frame for satisfaction of the condition for payment of the additional consideration component has no effect on the offer period which remains at 30 days (or a longer period if the offer were extended in accordance with the Code). Rank submitted that the offer and its terms are incapable of being dissected and that the offer must be considered in its entirety. Regardless of whether the 90% acceptance level requirement is met within seven business days, the offer, with a consideration of either $2.75 or $2.70 per share, will be capable of acceptance for the 30 day period required by the Code.
 In Rank's view rule 24 of the Code simply requires an offer to specify an offer period of at least 30 days from the date of the offer during which time the offer will be available for acceptance by the target company shareholders.
 Rank states that the additional consideration component is a contractual provision and as such is permitted by the Code. In support of this Rank noted that the Panel has on a number of occasions stated that subject to the express requirements of the Code an offeror is free to establish offer terms and conditions in accordance with normal contractual principles. Rank contends that it is not inconsistent with the Code to have economic or other consequences for all acceptors flowing from a contractual provision relating to the time of acceptance by some shareholders within the offer period.
 In characterising the additional consideration component as a variable pricing mechanism Rank noted that the Panel had in the past indicated that certain variable pricing mechanisms would be permitted. A practice note on variable pricing (dated 11 December 2002) stated that a variable priced offer which, for example, provided for a higher offer price being payable if the compulsory acquisition threshold were reached or if another specified event occurred, was permissible under the Code provided that all acceptors of the offer receive the same consideration in accordance with rule 201.
 Rank stated that all acceptors of the offer would receive the same consideration as required by rule 20 and the additional consideration component of its offer has the same effect as other variable priced offers which the Panel has previously considered Code compliant.
 Rank also submitted that although the provisions relating to payment of the additional consideration component were intended to encourage early acceptance of the offer they were not coercive. CHH shareholders would be free to reject or accept the offer at any time within the offer period. Rank suggested that every offer by virtue of its nature and time frames includes an element of pressure.
 The Panel had to determine whether Rank had not acted, or was not acting, or intended not to act in compliance with the Code by providing in the terms of its proposed offer that part of the consideration would only be paid if, by acceptances of the offer, it became the holder or controller of more than 90% of the voting rights in CHH by the close of the seventh business day after the date of the offer.
 The Panel agrees with Rank that parties are free to include contractual terms in offers but such terms must be within the framework of the Code. The Panel considers that the additional consideration component of Rank’s offer is not within the framework of the Code.
 The Code is an enhanced participation regime designed to ensure that all shareholders participate in the takeover process. The framework of the Code includes two key components to help achieve this:
(a) The first is to ensure that shareholders have sufficient information on which to decide for themselves the merits of a takeover offer;
(b) The second is to give shareholders a reasonable time in which to receive and consider the information and to consider the merits of an offer.
 The reasonable period of time for shareholders to consider the merits of an offer is prescribed by rule 24(1) and (2), the key elements of which for the purposes of this case are:
(a) That the offer must specify the period for which it will remain open and must remain open for that period; and
(b) That the offer period must be not shorter than 30 days.
 The draft offer document specified an offer period of 30 days from the date of the offer. However, one part of the offer, the additional consideration component, will only be available if acceptances are received which result in Rank becoming the dominant owner of CHH within seven business days from the date of the offer.
 The Panel agrees with Rank’s submission that the offer and its terms are incapable of being dissected and that the offer must be considered in its entirety. In determining whether the entire offer complies with rule 24 the Panel is entitled to look at the effect of the offer and all its terms and components.
 The effect of the limitation on the availability of the additional consideration component is that if CHH shareholders wished to receive the additional consideration component a significant portion of them would need to accept the offer within seven business days of the date of the offer. They would not be able to consider the offer for the 30 day period required by rule 24(2) and specified by Rank as the offer period.
 Accordingly the effect of the provision in the offer relating to the additional consideration component is to shorten the period within which shareholders can consider the offer in its entirety from 30 calendar days to seven business days from the date of the offer.
 In the Panel’s view the Code does not allow bidders to introduce terms for a differential payment, dependent on early acceptance by the holders of a stipulated number of shares. To do so effectively reduces the nominated offer period, to the shorter time given for acceptances to contribute to the achievement of the higher price. The minimum offer period required by rule 24 is clearly intended to prevent the terms of an offer being used to shorten the offer period below either the period that the offer will be open for required to be stipulated under rule 24(1), or the minimum period of 30 days required by rule 24(2).
 In this case the terms of the offer would mean that the offer in its entirety will not remain open for the period specified in the offer document. In addition, a particular component of the offer is not open for acceptance after the first seven business days, which is less than the required 30 day period.
 Rank characterised the additional consideration component as a variable pricing mechanism and the seven day period for satisfaction of the condition as a reference point for pricing. The provision may well be a variable pricing mechanism but for the reasons stated above it breaches the provisions of rule 24 and therefore is not permissible.
 The Panel determines that the limiting terms of the proposed offer in respect of the full offer price of $2.75 have the effect of shortening the period during which shareholders can consider the offer in its entirety from 30 calendar days as required by rule 24(2) to seven business days from the date of the offer.
 In addition the offer would not comply with rule 24(1) as the offer in its entirety would, in effect, not be open for the period specified in the offer document, in this case 30 days.
 Accordingly, the Panel determines that it is not satisfied that Rank has acted, or is acting, or intends to act in compliance with the Code in that the terms of Rank’s proposed takeover offer do not comply with rule 24 of the Code.
 To remedy the defect in the proposed offer the Panel has accepted an undertaking from Rank, under section 31T of the Act, that it will only make a takeover offer for CHH on the basis of the takeover notice of 3 February 2006 if:
(a) The terms and conditions of the offer are varied so that offer price will be $2.75 per share and there are no conditions requiring early acceptance in order for the consideration to be paid; and
(b) The prior written approval of the directors of CHH is given in respect of the variation required under subclause (a) (pursuant to rule 44(1)(b)(iii).
 Rank has provided the Panel with an undertaking in the terms outlined above.
 The Panel will deal with costs separately in terms of the Takeovers (Fees) Regulations 2001.
DATED at Auckland this 15th day of February 2006
SIGNED for and on behalf of the Panelby the Chairman
J C King