The Takeovers Panel’s exemption power
Published 1 January 2005
Since the introduction of the Takeovers Code the Panel has received a large number of applications for exemption from compliance with the Code. Many of the applications indicate that the purpose of and limitations on the Panel’s exemption power are not fully understood in the market.
The purpose of this guidance note is to clarify the Panel’s exemption power and to assist market participants in their appreciation of when exemptions are likely to be granted.
The Code applies to all events which involve a change of control in excess of 20% of a Code company’s voting rights and provides a number of mechanisms that can be utilised to increase voting control. Companies and investors are entitled and obliged to conduct their affairs on the basis of the provisions of the Code and the protections contained within it. The Code applies equally to all market participants.
The Panel is concerned that an increasing number of market participants are seeking exemptions to avoid the need for compliance with the Code, or to enable the use of an alternative transaction structure, to achieve a particular commercial outcome or benefit. The Panel wishes to ensure that market participants appreciate the purpose of and limitations on the Panel’s exemption power.
The Panel has power under section 45 of the Takeovers Act (the Act) to grant exemptions from compliance with the Code. However, the Panel is constrained by section 45(4A) which requires that the Panel’s reasons for granting an exemption must include:
- why it is appropriate that the exemption is granted; and
- how the exemption is consistent with the objectives of the Code.
It is clear that the Panel’s exemption power is not intended to enable market participants to avoid or modify provisions of the Code so that they can structure a transaction in a manner that does not comply with the Code.
The Code is broad in its effect and in some areas is quite prescriptive in its requirements. As a consequence in some cases the Code may have unintended consequences or may not adequately provide for unexpected or unusual circumstances. The exemption power is, therefore, necessary to deal with these situations to ensure that the Code operates effectively and efficiently and fulfils its objectives.
Some applicants for exemption seek in support of their applications to refer solely to the objectives of the Code contained in section 20 of the Act. However, these were the objectives required to be considered by the Panel in formulating the Code. The way in which these objectives were interpreted and balanced against each other can be seen in the Code that was ultimately gazetted and became law. Consequently, when considering for the purposes of an exemption application the objectives of the Code, careful consideration must be given to the various obligations and requirements of the Code itself. For example, the objective in section 20 of the Act of “assisting in ensuring that the holders of securities in a takeover are treated fairly” is reflected in rule 20 of the Code which provides that an offer must be made on the same terms and offer the same consideration to all shareholders of the same class.
The Panel will, therefore, in deciding whether an exemption is appropriate, consider whether compliance with the Code is possible and whether compliance would create an inappropriate, unreasonable or unintended result.
Furthermore, the exemption itself must be consistent with the objectives of the Code as embodied in the provisions of the Code. Consequently the conditions upon which exemptions are 2 granted are designed to preserve the underlying purpose and intent of the relevant provisions of the Code.
The class exemptions contained in the Takeovers Code (Class Exemptions) Notice (No.2) 2001 demonstrate the types of situations that the Panel’s exemption power is intended to address. For example a shareholder that increases its level of voting control above 20% in a Code company as a result of a buyback by a company of its own shares cannot do so in compliance with the Code because the Code provides no appropriate mechanism. The Panel granted a class exemption from the fundamental rule to address this situation. The conditions of that exemption ensure that the underlying purpose and intent of the provisions of the Code are preserved by requiring either that the relevant shareholder sell down its interest within a specified time or shareholders of the Code company give their prior approval to the maximum potential increase in voting control that could result from the buyback.
A review of the various specific exemptions granted by the Panel will show the same approach in a range of different circumstances where the exemption deals with compliance difficulties subject to conditions based on the objectives of the Code.
The Panel has also issued policy statements from time to time to deal with special cases. For example the Panel has issued a policy statement dealing with schemes of arrangement. A scheme of arrangement is a procedure under the Companies Act 1993 to facilitate mergers. However, the subsequent enactment of the Takeovers Act and the Code has meant that mergers by way of schemes of arrangement are unlikely to be possible without the assistance of some form of exemption from the Code. The Panel has been unwilling to see the statutory scheme of arrangement procedure for mergers rendered ineffective by the Code. Consequently, the Panel’s policy is aimed at permitting mergers by way of schemes of arrangement in limited circumstances and subject to certain conditions which provide a balance between the objectives of both pieces of legislation.
The Panel has also used its exemption power to assist in the rectification of breaches of the Code where this is appropriate in the interests of all parties to a takeover transaction. An example of such a use of the exemption power was the exemption from the compulsory acquisition provisions of the Code granted to SK Foods International in relation to its takeover offer for Cedenco Foods Limited. SK Foods had failed to comply strictly with certain rules of the Code in seeking to enforce its compulsory acquisition rights and consequently was in breach of the Code. The Panel took the view that it was in the interests of all parties to allow the compulsory acquisition to proceed by way of exemption but subject to conditions which ensured that the policy and intent of the Code in relation to the compulsory acquisition procedure was fulfilled.
Against this background of the nature of the Panel’s exemption power we discuss below recent applications made to the Panel for exemptions in respect of upstream acquisitions, differential offers, scrip offers and offers for convertible securities.