Comment on Rule 16
Published 1 December 2001
As an exception to the fundamental rule contained in rule 6 of the Takeovers Code, a person may become the holder or controller of an increased percentage of the voting rights in a Code company by an allotment approved by an ordinary resolution of shareholders under rule 7(d). In this situation, the requirements of rule 16 Notice of meeting: allotment of voting securities, must be met.
Rule 16 (b) and (d) require the notice of meeting to state among other things:
- the number of voting securities being allotted to the allottee;
- the percentage that number represents of the voting shares on issue post-allotment;
- the total percentage of the voting rights on issue that the allottee will have post-allotment; and
- the price at which the securities will be issued and the date the consideration is payable.
The situation may arise where rule 7(d) cannot be complied with because the notice of meeting is unable to state the particulars of rule 16, especially 16(b) or (d). This situation can arise in a number of instances including:
- major shareholder underwriting a pro rata issue of voting securities made to all shareholders;
- issue of options convertible at a later date; or
- issue of convertible notes, convertible at a later date.
The precise number of voting securities to be allotted might be unknown because:
- the exact number of options that may be exercised is unknown;
- a conversion ratio for convertible notes may not be known;
- the number of shares that a principal shareholder has to subscribe for under an underwriting agreement is not known.
Often where an event is happening in the future the outcome post-allotment cannot be stated with the certainty required by the Code.
In such cases, an exemption from rule 16 is required for the allotting company, and an exemption from rule 7(d), to the extent that rule 7(d) requires compliance with rule 16, is required for the allottee. An exemption aims to facilitate such allotment arrangements while remaining consistent with the objectives of the Code. To achieve this outcome conditions will be imposed relating to the information to be included in the notice of meeting. They are also likely to include:
- a constraint on any change in effective control of the allottee between the time of shareholder approval of the allotment of voting securities and the allotment itself; and
- a requirement to disclose the effect of any ability of the shareholder to take advantage of the “creep” provisions of rule 7(e) of the Code.