The Code in business language
Published 1 February 2001
The Takeovers Code is the schedule to the Takeovers Code Approval Order 2000 (SR 2000/210). The Code comes into force on 1 July 2001.
The 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 following is an outline of the Code.
The Code applies to “Code companies”.
Code companies are companies registered under the Companies Act 1993 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.
The Code is based on a fundamental rule which prevents any person from becoming the holder or controller of 20% or more of the voting rights in a Code company except in a manner permitted by the Code.
The fundamental rule is based on control of voting rights. “Control” is defined as “having, directly or indirectly, effective control of the voting right”.
A holder or controller of 20% or more of the voting rights of a Code company cannot increase its voting rights except as permitted by the Code. There are no restrictions below the 20% threshold.
The fundamental rule has anti-avoidance provisions which deal with situations where groups of people act jointly, or in concert, or join together as associates.
The fundamental rule catches, and is intended to catch, increases in voting power in a manner which can be regarded as involuntary. This can arise with transactions such as rights issues, buy backs and amalgamations.
Class exemptions will be required to deal with these transactions. In formulating class exemptions policy issues will need to be addressed. 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.
The class 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. They are:
- full and partial offers.
- acquisition or allotment of voting securities with the approval of an ordinary resolution of shareholders of the Code company.
- 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.
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.
A partial offer is an offer to all the holders of voting securities for a specified percentage of the voting securities in the target company. The offer is not required to include other equity securities.
Shareholders may sell all or part of their holdings but there are scaling provisions in the Code based on the specified percentage if there are excess acceptances.
The partial offer must be for sufficient voting rights to take the offeror’s holding over 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 that object to the lesser percentage. For this purpose voting rights held by the bidder and its associates are disregarded.
Provisions relating to offers
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.
Equal treatment of shareholders
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 securities, an independent adviser must certify that the price is fair and reasonable as between classes.
There is no restriction on the price that may be offered except that the price must be fair and reasonable between different classes of securities
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 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.
The Code sets out a procedure for takeover offers. This is based on the existing procedures under the Companies Amendment Act 1963 which is being repealed.
The offeror and the target company are required to disclose a range of information which is more extensive than was required under the Companies Amendment Act 1963. In addition, the directors of the target company must obtain a report from an independent adviser on the merits of an offer. The target company directors must also recommend whether the offer should be accepted or rejected or, if they are unable or unwilling to make that recommendation, provide a statement to that effect and the reasons.
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 outside of the offer procedure 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 by the directors to frustrate the offer or prevent the shareholders from having the opportunity to consider the offer are not permitted. However this does not prevent directors from taking steps to encourage competing bona fide offers from other parties, and does not prevent actions which:
- have been approved by an ordinary resolution of the target company;
- are taken or permitted under a contractual obligation or in the implementation of proposals approved by the directors of the target company (the contract must have been entered into or the proposals approved before a takeover notice was received or the target company became aware that an offer was imminent); or
- are taken or permitted for reasons unrelated to the offer with the prior approval of the Takeovers Panel.
Acquisition and allotment with shareholder approval
The procedures for the meeting require the offeror and the target company to disclose a range of information. In addition, the directors of the target company must obtain a report from an independent adviser on the merits of the proposal. The target company directors must recommend whether or not the proposal should be approved or, if they are unable or unwilling to make that recommendation, provide a statement to that effect and the reasons.
Interested parties and their associates cannot vote at the meeting.
The Code’s compulsory purchase provisions apply when the threshold of 90% of voting rights has been reached. 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 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 for the remaining shares is the price offered under the Code 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 notice of such a meeting has been given, an interim 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. If the Panel did not make an interim restraining order, it may make a restraining order for up to 21 days. The Panel may 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;
- shareholders and affected former shareholders 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 requested the Panel to apply to the Court and the Panel has not done so within 10 days.
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 it does not make a determination on compliance 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 Court may have regard to any determination or recommendation made by the Panel, including any recommendation made at the request of the Court.
The Takeovers Act provides significant pecuniary penalties. A person who breaches the Code or is party to a breach may be ordered to pay a fine of up to $500,000 in the case of a person or $5 million in the case of a body corporate.