New Rule 64 – Misleading or Deceptive Conduct
Published 1 December 2007
The new rule 64 of the Takeovers Code prohibits misleading or deceptive conduct in relation to Code-regulated transactions. Market participants need to be aware that when this conduct occurs the Panel will respond in an appropriate manner to protect the interests of the market.
Prohibition against misleading or deceptive conduct
The prohibition in rule 64 of the Code against misleading or deceptive conduct during Code-regulated transactions comes into force on 29 February 2008. New sections 44B to 44E of the Takeovers Act (which also relate to misleading conduct) will come into force at the same time.
Rule 64 provides:
(1) A person must not engage in conduct that is –
(a) conduct in relation to any transaction or event that is regulated by the Code; and
(b) misleading or deceptive or likely to mislead or deceive.
(2) A person must not engage in conduct that is –
(a) incidental or preliminary to a transaction or event that is or is likely to be regulated by the Code; and
(b) misleading or deceptive or likely to mislead or deceive.
Rule 64 enables the Panel to exercise its enforcement powers for any misleading or deceptive conduct relating to Code-regulated transactions or events. Misleading or deceptive conduct that is incidental or preliminary to transactions or events that are, or are likely to be, regulated by the Code, will also be subject to the Panel’s enforcement powers.
Rule 64 applies to any person – not just to bidders or target companies or major shareholders. Any person who engages in misleading or deceptive conduct relating to a Code regulated transaction or event is caught by the prohibition.
As well as the rule 64 prohibition, it will also be a criminal offence, under new section 44C of the Takeovers Act, to make or disseminate materially false or misleading statements or information relating to Code-regulated transactions or events. The penalties for this offence are, for an individual, imprisonment for up to five years or a fine of up to $300,000, or both. For a body corporate, a fine of up to $1 million can be imposed.
Meaning of misleading or deceptive conduct
Rule 64 has broad application. It is based on section 9 of the Fair Trading Act 1986 which prohibits misleading and deceptive conduct in trade.
The term ‘misleading or deceptive’ has been subject to wide judicial consideration over many years in many cases in New Zealand and Australia. It appears frequently in consumer protection legislation (such as the Fair Trading Act and the Australian Trade Practices Act 1974). The term also occurs in the market manipulation provisions of the Australian Corporations Act 2001.
An analysis of Australian case law indicates that the Courts in Australia apply the consumer protection tests and reasoning to market manipulation cases. It is reasonable to believe that the same would occur in New Zealand Courts.
The Panel intends to construe the words ‘misleading’ and ‘deceptive’ in the same way as the New Zealand and Australian Courts. They will be given their natural and ordinary meaning of ‘to lead into error’. Accordingly, the Panel will consider Code-related conduct to be misleading or deceptive if it leads, or would be likely to lead, persons into error.
When these new provisions come into force, the Fair Trading Act will no longer apply to conduct regulated by the Code and the Takeovers Act. This enhances the Panel’s role as the primary regulator of changes of control in Code companies.
Panel will take enforcement action against misleading or deceptive conduct
Market participants involved in a takeover or other Code related transaction should always take care if they make any representations to the media or to the market. This will be even more important when rule 64 is operative. When misleading or deceptive conduct takes place during a Code related transaction or event, the Panel will respond in an appropriate manner to protect the interests of the market.
How the Panel will deal with ‘last and final statements’
Parties involved in a takeover often make announcements about their intentions for the takeover. These statements are made to influence other parties to the takeover and are described generically by takeover regulators as ‘last and final statements’.
Statements by an offeror, such as “[Offeror Ltd] will not increase the offer price”, or “[Offeror Ltd] will not extend the offer period” are last and final statements. At times, major shareholders in a target company will make announcements about their intentions, such as “[Shareholding Company Ltd] does not intend to accept the offer”. Any later inconsistent action or statement risks breaching rule 64. The Panel will rigorously enforce the prohibition against misleading or deceptive conduct.
The integrity of the market requires that statements made in relation to takeovers can be relied on. For that reason, last and final statements must be adhered to as to a promise. The Panel intends to enforce those promises.
Last and final statements must be qualified or adhered to strictly
Last and final statements may be qualified when they are made, in order to preserve the right to depart from the statement. However, such qualifications must be clear and unequivocal. For example, “At present [Offeror Ltd] does not intend to increase the offer price, but it reserves the right to do so,” is a clearly qualified statement.
As a matter of practice, the Panel will write to those who make last and final statements at the time of their publication or when drawn to the Panel’s attention. If the statement is unqualified, the Panel will ask whether an unqualified statement is what was really intended. If it was not intended to be an unqualified statement, the person will be invited to promptly publish a qualification to the statement.
The person will be put on notice that unqualified statements must be adhered to. If the statement is equivocally qualified, the Panel will invite the person to clarify their position to the market and to the Panel immediately.
If clearly misleading conduct occurs, such as departing from the terms of an unqualified last and final statement, and the parties involved are not prepared or are not able to correct that conduct, the Panel is likely to call a meeting under section 32 of the Takeovers Act (which gives the Panel its principal enforcement powers). In these circumstances the Panel may give just 24 or 48 hours’ notice of the meeting. The Panel’s intention for calling these meetings with short periods of notice is to ensure that any misinformation in the market, which is misleading or deceptive or is likely to mislead or deceive, is corrected promptly.
Restraining orders and compliance orders are likely to be made by the Panel where there has been a departure from a last and final statement. Court orders will be sought if any transactions require unwinding. The Panel believes that the integrity of information in the market must be upheld, so that market participants can rely on that information. Those who make last and final statements should be held to the terms of those statements.
Remedies for misleading or deceptive conduct
When the Panel determines that a breach of rule 64 has occurred, any remedy the Panel orders will be balanced between providing certainty for the market and achieving the appropriate commercial outcome. The Panel is likely to require those who make last and final statements to act in accordance with those statements and to promptly correct any misinformation.
Keeping a takeover bid on track is likely to be at the forefront of the Panel’s reasoning for the remedies put in place. However, in some cases it may be more appropriate to stop a bid from proceeding. The Panel will consider every case on its merits.
The Panel has new powers to require corrective statements to be published, without having to obtain Court orders. The Panel can also prohibit people from making statements or distributing documents. The remedies and penalties available through the Court have also been extended (see CodeWord 17).
The Panel may seek pecuniary penalties against company directors who knowingly are involved in a company’s misleading conduct. A director who incurs a pecuniary penalty is also automatically banned for five years from managing a New Zealand company.
Panel does not want its resources wasted
In a contest for control of a Code company, or where a takeover is opposed, parties often look for an opportunity to complain to regulators. Because of the likelihood of tactical complaints being made in these circumstances, and also to manage its enforcement resources efficiently and responsibly, the Panel may apply threshold tests to decide whether to act on a complaint about misleading or deceptive conduct.
A departure from an unqualified last and final statement is likely to be seen as misleading or deceptive conduct, and the Panel will take prompt action on such departures. However, the question as to whether other Code-related conduct is misleading or deceptive or is likely to mislead or deceive may be less clear.
To enable the Panel to use its enforcement resources most effectively complainants may have to do more than merely complain to the Panel.
The Panel dislikes being drawn into a takeover contest through tit-for-tat complaints. Protagonists in a contested or hostile takeover must convince the Panel that its resources would be properly used if it acts on their complaint. For example, the complainant may be required to show that it has a prima facie case, or that the complaint is not vexatious, or to establish that there would be merit in the Panel’s acting on the complaint.
A complainant’s formal request that the Panel convene a section 32 meeting to determine whether there has been a breach of the Code is always taken very seriously by the Panel. However, complainants should be aware that they may have to pay the Panel’s expenses if, as a result of a section 32 meeting, the Panel determines that the Code has not been breached.
Take care when making public statements
A note of caution for anyone making public statements about Code-related transactions or events: under rule 64 no element of intention to mislead or deceive is required. Think carefully about words and actions and how others may perceive them.
Conduct may be found to be misleading or deceptive even if it was not intended to mislead or deceive. It still may unintentionally lead persons into error. However, if a person is found to have deliberately misled or deceived market participants, the remedies sought by the Panel are more likely to include pecuniary penalties.