Published 1 March 2004
Scrip offers can provide difficulties for a bidder in two areas. First, small shareholders may receive unmarketable parcels of scrip. Second, overseas shareholders may necessitate compliance with the requirements of overseas jurisdictions. The Panel has considered both issues.
Unmarketable parcels – class exemption (2003/234)
Rule 20 of the Code requires an offer to be made on the same terms and provide the same consideration for all securities of the same class. The effect is that an offeror who makes a takeover offer with consideration that includes securities listed on a stock exchange may be obliged to provide some smaller security holders with an unmarketable parcel of securities. Unmarketable parcels of securities may be difficult for security holders to deal with and are expensive for companies to administer.
Consequently the Panel has granted a class exemption to allow offerors to limit the consideration offered to small security holders to cash.
The expression “small security holder” referred to in the exemption is defined as a person who would, if that person was offered, and accepted, consideration securities under a scrip offer, receive an unmarketable parcel of consideration securities. The other key definition is the “unmarketable parcel” which is defined as a number of consideration securities that is less than the minimum holding of consideration securities specified by the stock exchange.
This class exemption obviates the need for specific exemptions in cases where scrip consideration may result in the issue of unmarketable parcels of shares.
The exemption specifies the way in which the cash consideration which is to replace the scrip consideration is to be calculated. It provides:
- if the offer does not include a cash alternative, the cash consideration is an amount equal to the value of the shares, plus any additional cash under the offer; and
- if the offer does include a cash alternative, the cash consideration is the greater of:
- the amount of the cash alternative; and
- an amount equivalent to the value of the shares, plus any additional cash under the offer.
The “value of the shares” offered as scrip is defined as the weighted average of the closing prices of the shares on the exchange over a period of five trading days immediately preceding a date which is five days before the first date when consideration is sent to any offeree who has accepted the offer.
Bidders wishing to offer scrip under a takeover offer will need to ensure that the offer complies with securities laws in every country where target company security holders reside.
The Panel is aware that compliance with securities law requirements in overseas jurisdictions can be expensive and time consuming for bidders. Most jurisdictions have rules or regulations governing the offer of scrip under a takeover offer and many jurisdictions impose prospectus-type requirements in respect of such offers. Compliance with such overseas requirements as well as New Zealand securities law requirements increases the cost and complexity of making a scrip offer for a New Zealand Code company.
Since the introduction of the Code the Panel has granted two individual exemptions from rule 20 to address difficulties created by the offer of scrip to overseas shareholders. Each exemption in effect allowed the bidder to offer cash rather than scrip to certain overseas shareholders. The exemptions were granted in respect of:
- Normandy NFM Limited’s offer for Otter Gold Mines Limited. Normandy proposed to offer scrip as consideration for the Otter shares. The vast majority of its shareholders lived in New Zealand and Australia, and Normandy could offer scrip to those shareholders using the New Zealand takeover documentation and its Australian prospectus. However, shareholders in other jurisdictions held approximately 1.22% of the shares in Otter;
- Independent Newspapers Limited’s offer for all of the shares in Sky Network Television Limited. The consideration offered had both a scrip and a cash component. INL’s offer could be made in New Zealand, Australia, the United Kingdom and the United States using the New Zealand offer documents. However, approximately 25 Sky shareholders, together holding less than 1% of the shares in Sky, were resident in other jurisdictions.
In both cases the bidders intended to offer scrip in jurisdictions in which New Zealand disclosure documents could be used. However, the bidders stated that because of the small number of shareholders resident in other jurisdictions it was not practical or cost effective to ensure that the scrip offer complied with securities laws in those other jurisdictions. Both bidders proposed to use a nominee arrangement to convert the scrip into cash which would be passed on to the overseas shareholders and sought an exemption from rule 20 to allow them to offer this alternative consideration.
The policy of rule 20 is to ensure that there is equal treatment of all security holders of a Code company and the Panel is reluctant to grant exemptions which would allow offers to be made to certain shareholders on different terms. However, the Panel recognises that it is important that the making of scrip offers be a real and practical option available to bidders under the Code. In addition a proper relationship needs to be maintained between the cost of compliance with the Code and the benefits resulting from it.
The Panel granted exemptions from rule 20 to Normandy and INL which in effect allowed cash to be offered to certain overseas shareholders because in both cases the Panel was satisfied that the number of shares held by shareholders in the relevant jurisdictions was of such a low level that compliance with the securities law requirements in those jurisdictions would have been impractical and unreasonably expensive in the context of the offer.
In addition the Panel was satisfied that the alternative consideration to be offered to overseas shareholders was appropriate. Overseas shareholders were offered the equivalent market value (less reasonable expenses) of the scrip offered to remaining shareholders. This was intended to put the overseas shareholders in the same position as shareholders who receive and immediately sell the scrip offered by the bidder. The market value of the scrip offered by Normandy and INL was relatively easy to establish as in each case it was listed on a recognised exchange.
The Panel recognises that the type of difficulties faced by INL and Normandy may arise in respect of future scrip takeover offers. Most Code companies of any size will have shareholders resident overseas. Accordingly, the Panel considers that it is appropriate to indicate when it would be likely to grant specific exemptions from rule 20 to allow cash to be offered to certain overseas shareholders. In general the Panel will grant such an exemption if it is satisfied that, in respect of each jurisdiction in respect of which an exemption is sought:
- the number of target company securities held by shareholders in that jurisdiction is a small percentage of the total issued securities;
- the scrip offer cannot be made using the New Zealand takeover offer, investment statement and/or prospectus; and
- compliance with securities laws in that jurisdiction would be impractical or unreasonably expensive in the context of the offer.
In addition, the Panel would only be likely to grant an exemption from rule 20 if it considers that the alternative consideration to be offered to overseas shareholders is appropriate. The alternative consideration offered should be cash equal to the value of the scrip. As previously noted, this is easier to establish when the scrip is listed on a recognised exchange. If the scrip is unlisted, and a market value is not available, an independent valuation of the scrip offered may be required. Each case will be treated on its merits.
Bidders intending to make scrip offers who wish to apply for an exemption from rule 20 to allow cash to be offered to overseas shareholders should provide evidence that the above criteria is satisfied in respect of each jurisdiction in which Code company shareholders are resident and for which exemption is sought. This will require a bidder to make inquiries in each such jurisdiction.
A number of jurisdictions recognise the difficulties facing bidders offering scrip in other jurisdictions. Consequently, in the interests of shareholders resident within their jurisdictions, they have established practical and cost effective procedures to enable scrip offers to be extended to those shareholders.
There is a perception that obtaining advice in respect of the requirements of overseas jurisdictions is prohibitively expensive. This is not always the case. Seeking information regarding overseas requirements does not always require the bidder to instruct overseas advisers. Information can sometimes be obtained from overseas regulators at little or no cost. However, the Panel does recognise that differences in language and culture may make it difficult to obtain the relevant information. In such cases, if the applicant is able to demonstrate such difficulties, the number of shareholders resident in that jurisdiction is extremely small and the relevant jurisdiction is not one of those in which it is common for shareholders in New Zealand Code companies to reside, the Panel may be willing to consider an application without evidence of the cost of compliance with the requirements in that jurisdiction.