CODEWORD

Under section 45 of the Takeovers Act 1993 the Panel may exempt any person or class of persons from compliance with any provision in the Takeovers Code.

The Act requires the Panel to state its reasons for granting each exemption. The statement of reasons is required to include

• why it is appropriate that the exemption is granted; and
• how the exemption is consistent with the objectives of the Code.

Issues 4, 5 and 8 of CodeWord discussed exemptions that the Panel has granted to date, including the reasons for granting those exemptions. The Panel has declined approximately half of all exemption applications. It has also modified many others. That is to say, exemptions have been granted but on terms and conditions that are somewhat different from those initially sought by the applicants.

This article explains more about the Panel’s consideration of exemptions by looking at applications that have been declined, and at some of the conditions that are commonly imposed on exemptions that have been approved.

Code does not apply

Some applications have been declined because the Panel formed the view that the Code did not apply to a proposed transaction and that it was consequently not possible for the Panel to grant an exemption from “compliance with any provision in the Takeovers Code.” One or two of these have been test cases, where the applicant was concerned the Code may apply to a particular transaction and sought an exemption to clarify the position.

The Code is concerned with control of voting rights. Where a transaction is being carried out under the amalgamation provisions of the Companies Act 1993, and the end result is that the target Code company goes out of existence, the Code is unlikely to apply because after the transactions there are no voting rights of the Code company.

Maintaining the fundamental parameters of the Code

The Code is a set of rules, much like those of a sporting contest, which govern competition for control of companies. The Panel’s job is to administer those rules, much like a referee, to ensure fairness for all competitors. The Panel must also be consistent in its administration of the rules of the Code, so that market participants know where they stand.

For this reason the Panel has declined to grant exemptions from the fundamental control thresholds prescribed in the Code. Applications declined have included:

• an application for an exemption from the 90% threshold for compulsory acquisition. The applicant held close to 90% of a Code company’s voting rights and sought to be able to compulsorily acquire the remaining shares at less than the usual 90% control level;
• an application for exemption from the minimum acceptance rule to allow a bidder to increase its strategic stake without necessarily reaching 50%;
• an application for an exemption from rule 46(a). Rule 46(a) provides that a target company must send its target company statement, at the latest, within 14 days of receiving the offeror’s despatch notice. The applicant sought an exemption to allow it to send its target company statement 19 days after it had received the despatch notice. The Panel declined the exemption application, which put the applicant in breach of the Code;
• an application for an exemption from rule 7(e) (the creep provision). Rule 7 (e) allows a person to increase its holding by no more than 5% of a Code company’s total voting rights in a 12-month period. The applicant sought an exemption to allow it to increase its control in the Code company by more than 5% within a 12-month period, having recently made a takeover offer for the company. Companies making takeover offers should be aware that if they fail to reach the 90% threshold for compulsory acquisition, they will have to wait 12 months before being able to further increase their shareholding in the target company under rule 7(e).

The Code prescribes certain ways to increase control of a Code company

Apart from prescribing the rules for takeover offers, the Code permits entities to increase their control percentages through allotments of new shares, or acquisitions from existing shareholders, with approval from the non-associated shareholders.

The information that has to be provided to shareholders who are eligible to vote is very tightly prescribed by the Code.

The Panel has granted a number of exemptions in respect of the Code’s notice of meeting requirements, particularly rules 15 and 16, where the nature of the proposed transaction means that the strict disclosure requirements of the Code cannot be complied with. For example:

• Some of these exemptions have been in respect of shareholder meetings called to approve a potential increased control percentage beyond the 20% threshold by a major shareholder/underwriter (who is not a professional underwriter) arising from its underwriting of any shortfall in the take-up by shareholders of a pro-rata rights offer. While the Panel has granted exemptions in these circumstances, it will not allow the shareholder/ underwriter to buy rights in the market. In the Panel’s view such behaviour is not consistent with normal underwriting principles; 

• Other exemptions have been sought for transactions involving future allotments of shares on a contingent basis, or at an unknown exercise price, for example a price dependent on the performance of an entity that is to be acquired, or on future movements in share prices. The Panel looks very carefully at these applications, and is unlikely to approve exemptions that would allow shareholders to vote to approve arrangements that are not firm and binding, or that leave wide discretion available to the directors.

The Panel is very reluctant to step into the shoes of the shareholder

The Panel has declined some applications for exemption in respect of increases in the control of voting rights where approval can be sought from shareholders under rules 7(c) (for an acquisition) or 7(d) (for an allotment).

In general, the Panel is reluctant to “step into the shoes of shareholders” by removing their discretion to approve or reject an increase in control.

Blanket exemptions

The Panel will resist granting blanket exemptions. It has declined a blanket exemption application that arose under the special provisions of a Code company’s constitution.

The Panel is always alive to the dangers of avoidance activities and prefers to deal with specific transactions where the effect on voting rights and the control of the Code company is absolutely clear.

In summary

The Panel is reluctant to grant exemptions, but does so primarily to deal with technicalities where it is difficult or impossible to comply strictly with the express requirements of the Code. An overriding requirement in all cases is that the exemption must be consistent with the objectives of the Code.