Practice Note - exemptions from clause 26 of schedule 2 of the Code

Published 1 November 2005

Rule 46 of the Code requires a target company, on receipt of a takeover offer, to prepare a target company statement for distribution to its shareholders. That statement must be certified by two directors and two senior executives of the company in accordance with clause 26 of Schedule 2 of the Code.

The Panel considers that clause 26 certification is an important requirement of the Code. (See also Takeover documents must comply with the Code on page 1.).

The Panel has recently declined several applications for exemption from the requirements of clause 26. This practice note aims to help market participants understand the Panel’s approach when considering requests for exemption from clause 26.

Clause 26 certificates

Clause 26 requires the chief executive officer, the chief financial officer, and two directors of the target company to certify that to the best of their knowledge and belief, after making proper enquiry, the information contained in or accompanying the target company statement is true and correct and not misleading, whether by omission of any information or otherwise, and includes all the information required to be disclosed by the target company under the Takeovers Code.

The intention of clause 26 is to ensure that the target company’s two most relevant senior executives share responsibility for the factual accuracy of the target company statement. The Chief Executive Officer and Chief Financial Officer must be involved in this process because of their detailed knowledge of the affairs of the company, knowledge which directors may not have. The senior executives are not required to make recommendations to accept or reject the offer; that is a matter for the independent directors of the target company. Nor are they required to certify opinions, such as those expressed in the independent adviser’s report which forms part of the target company statement (see clause 19). However, the certificate does extend to the contents of the independent adviser’s report, including its analysis.

Exemptions declined

Two representative examples of applications for exemption from clause 26 which the Panel has declined are discussed below.

One unsuccessful application was for an exemption in respect of the Chief Executive Officer and the Chief Financial Officer of a target company who also held the same positions with the offeror. The offeror had over 80% of shares in the target company when the takeover offer was made. The applicant submitted that it would be inappropriate, and contrary to usual practices of good corporate governance, for the senior executives to certify the target company statement. The Panel would not grant the exemption to the two senior executives because, as a consequence, no senior executive of the target company would be taking responsibility for the information contained in or accompanying the target company statement. The Panel invited the target company to provide specific reasons why one or other of the senior executives should be exempted. No specific reasons, other than a perceived conflict of interest, were given and the Panel therefore declined the application.

A second unsuccessful application sought a retrospective exemption for the Chief Financial Officer not to have to sign the clause 26 certificate. The Panel was told that the chief financial officer was on secondment to the target company and was prevented by the terms of his engagement from making any public statement relating to the target company. It was proposed that the next most senior financial officer of the target company could certify instead. In response, the Panel said that the Chief Financial Officer could not avoid the clause 26 requirement because the secondment contract was subject to the overriding effect of rule 5 of the Code (which prevents parties from contracting out of the Code).

In at least two other takeovers the target company has been managed by the offeror and employed no executive staff of its own. In both these cases senior executives of the offeror signed the target company statement in their capacity as persons fulfilling the roles of senior executives of the target company. Although they had conflicts of interest, these people were responsible for the executive functions of the target company, including briefing the independent adviser about the target company’s prospects, so it would not be appropriate to exempt them from the obligation to sign the certificate.

Exemption granted

The Panel has only granted one exemption from clause 26. The Takeovers Code (Trans Tasman Properties Limited) Exemption Notice 2004 was briefly noted in CodeWord 12 (June 2004). SEA Holdings New Zealand Limited (SEA Holdings), already the controlling shareholder, made a controversial takeover offer for the shares it did not own in Trans Tasman Properties Limited (Trans Tasman). The independent directors of Trans Tasman were expected to reject the takeover offer. The independent adviser’s report prepared under rule 21 of the Code had concluded that it was neither fair nor reasonable. There were several shareholders who appeared quite hostile to SEA Holdings increasing its interest in Trans Tasman.

TransTasman applied for an exemption from the requirement that the Chief Executive Officer certify the target company statement. The same person was chief executive officer of both Trans Tasman and SEA Holdings. He was also chairman of Trans Tasman and a director of SEA Holdings.

The Panel granted the exemption for the stated reason that it was necessary to take into account the conflict of interest inherent in [the same person’s] roles as the chief executive officer of the offeror and also of the target company.

Some market participants appear to have interpreted this explanation to mean that an exemption from clause 26 will be appropriate in every case where a Chief Executive Officer or Chief Financial Officer is conflicted.

The Panel did not intend the explanation to be interpreted in this way. The circumstances of the SEA Holdings takeover offer were unusual and the Panel granted the exemption in recognition of the particular difficulties faced by the Chief Executive Officer, which went beyond the conflict of roles.

Clause 25 did not assist the Chief Executive Officer. Clause 25 requires the target company statement to include a statement that its contents have been approved by the “board of directors of the target company” and, if “any of the directors of the target company” do not approve of the statement, their names and their reasons for not approving it. The independent directors of Trans Tasman had approved the target company statement. The Chief Executive Officer, because of his association with SEA Holdings, was not a member of the committee. As a result, he was not asked to approve the target company statement in his capacity as a director of Trans Tasman.

The exemption was subject to the condition that the Chief Executive Officer sign a modified form of certificate, stating that he had provided all relevant information that Trans Tasman was obliged to disclose under the Code and necessary to enable Trans Tasman directors to sign the clause 26 certificate. The modified certificate also required the Chief Executive Officer to state that the information he had provided was true and correct and not misleading.


The clause 26 certificate is an important component of the target company statement. The Panel will only grant exemptions from this requirement when there are particularly compelling reasons to do so. The Panel expects such circumstances to be rare.

This practice note is provided for guidance only. While it signals the attitude of the Panel at this time, the Panel is not bound by this or any other practice note.

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