Initial Public Offering – Jade Exemption
Published 1 September 2003
The IPO class exemption (clause 7, Takeovers Code (Class Exemptions) Notice (No 2) 2001) relates to voting rights obtained through initial public offerings by newly listed companies
It provides exemptions from the fundamental rule (rule 6(1)) for increased control percentages arising from allotments of shares that occur within six months of the IPO. A condition of the exemption is that the offer complies with the Securities Act and that the potential control outcomes are clearly stated in the prospectus and investment statement.
During 2002 Jade Software Corporation Limited (Jade) was developing an IPO involving the issue of shares in what would become a Code company. Certain bonus share allotments that could be made after the IPO could not comply with the Panel’s IPO class exemption because they could occur up to eight years after the initial share issue. Jade sought a specific exemption from the Panel from the fundamental rule.
The bonus share allotments would arise from the issue of a separate outperformance share (OPS) for the benefit of shareholders who were listed on Jade’s register as at 14 December 2001. These allotments could be made in three separate tranches over eight years, depending on Jade reaching certain specified profitability targets.
Specific allotments under the OPS could probably have been approved by non-associated shareholders under rule 7(d) of the Code at the time they were to be made. However, this would have defeated their purpose and exposed the original OPS shareholders to the risk that non-associated shareholders of Jade, although they knew about the OPS when they acquired Jade shares, may decline to approve the allotments.
Jade’s situation was similar to the situation envisaged by the IPO class exemption. The basic premise of the IPO exemption is that subscribers are, by making the decision to subscribe, implicitly approving the control outcome set out in the offer document.
The exemption sought by Jade was granted subject to conditions, including that:
- any investment statement and prospectus for the IPO includes a summary of the terms of the OPS which clearly explains the terms of the bonus issues, and the dilutionary effects if one or more of the bonus issues were triggered;
- Jade’s annual report in each year the OPS is on issue includes a summary of the terms of the OPS and how these affect shareholders; and
- the key terms and conditions of the OPS could not be altered.
Although shareholders could not vote to approve the allotment of the bonus shares under the OPS at the date of allotment (which might otherwise have occurred under rule 7(d) of the Code) those shareholders would have accepted the OPS and its terms and conditions by deciding to invest in Jade either through the IPO or at a later time.
Recent announcements from Jade indicate that the IPO is unlikely to proceed.