CODEWORD

A number of amendments to the Takeovers Code will come into force on 1 June 2013. The amendments are the culmination of a review of the Code conducted by the Panel between 2010 and 2012. The purpose of the amendments is to reduce the number of exemptions granted by the Panel and to make the Code more effective and efficient. The amendments are contained in the Takeovers Code Approval Order Amendment Notice 2013.

Details of the Panel’s recommendations for the amendments and discussion of their effects are in recommendation papers to the Minister of Commerce and consultation papers published on the Panel’s website: www.takeovers.govt.nz.

This article is a summary of the various changes to the Code. The headings contain cross-references to the relevant clause in the amendment regulations.

A partial offer under the Code enables a person to make an offer for less than 100% of the voting securities in a Code company by way of an offer to all shareholders. The amendments will make a number of improvements to the partial offer process.

Calculating the specified percentage (clause 7)

Rule 9 of the Code requires the offeror to make its partial offer for a “specified percentage” of the equity securities of the target company that are not already held by the offeror. The rule will now include a formula for calculating the specified percentage. This will ensure that there are no misunderstandings about how to calculate the specified percentages for a partial offer.

Dilution of offeror’s shareholding during offer period (clause 7)

Under rule 23 of the Code, a partial offer must be conditional on the offeror receiving sufficient acceptances to confer on it, together with the voting rights it already holds or controls, more than 50% of the total voting rights or, in the case of an offer for a lesser percentage, the percentage approved by the offerees under rule 10(1)(b).

Rule 9 will be amended so that if the percentage of voting securities not already held or controlled by the offeror during the partial offer increases or decreases between the date that a takeover notice is sent under rule 41 and the end of the offer period, the specified percentage will be deemed to change in proportion to the increase or decrease. This avoids the problem of offerors not meeting minimum acceptances due to dilution of their shareholding during the offer period.

Example: a target company has 100,000 shares in total. The offeror already holds 25,000 shares and wishes to acquire 50.01% control (i.e., a further 25,010 shares). The offeror makes a partial offer for 33.33% (the “specified percentage”) of the shares held by the other shareholders. The target company then allots 10,000 new shares on the exercise of an option and the offeror does not participate in the allotment. Post-allotment the offeror now needs 30,011 shares (or 35.3% of the shares that it does not already hold) to obtain 50.01% control. Under the forthcoming amendment, the specified percentage for the offer will automatically adjust from 33.33% to 35.3%.

The Panel had previously addressed this issue by way of exemption. For these circumstances, an exemption will no longer be necessary.

New requirement for statement of particulars of partial offer (clause 30)

To assist offerees and their advisers to understand the terms of a partial offer, a new disclosure requirement will be added to the Code. The statement will require standardised information about the number and percentage of shares in the target company that are sought by the offeror. The information required parallels the particulars which must be included in a notice of meeting for the purposes of a resolution of shareholders under rules 7(c) or 7(d) of the Code.

Changes to the voting procedure for sub-50% offers (clause 8)

If a partial offer would result in the offeror holding or controlling 50% or less of the total voting rights in the target company, approval by the non-associated shareholders of the target company must be obtained under rule 10(1)(b) of the Code. The Panel identified several areas where the voting procedure could be improved to make it easier for shareholders to understand and for target companies to administer.

As a result of the amendments, the following changes will be made to rule 10(1)(b):

(a) The voting period will now close seven days before the end of the offer period. Previously, the voting period closed on the same day as the offer and this meant that the outcome of the vote was unlikely to be known before offerees had to decide whether to accept the offer. Now the outcome will be known in advance

(b) The persons who will be entitled to vote will be those persons holding voting securities in the target company as at the close of the voting period. Previously, there has been confusion about whether a person who acquired voting securities during the offer period was entitled to vote. 

(c) The voting document must now clearly state that the entitled voters are being asked to approve or object to the offeror increasing its voting control to a certain percentage (if the offer is successful). Previously, it was not clear whether rule 10 merely required general approval of the offer itself. The change also clarifies the percentage for the purposes of the offer’s minimum acceptance condition under rule 23 of the Code. 

(d) The approval document will now be called a “voting document”. 

(e) The offeror and its associates will be explicitly prohibited from voting.

Scaling of acceptances by custodian shareholders (clause 9)

If a partial offer is accepted in respect of more securities than are sought by the offeror, the scaling provisions in rules 12 and 13 of the Code determine the number of voting securities that the offeror must take up from those offerees who have accepted the offer in excess of the specified percentage. Rule 43 of the Code provides that the offerees are those persons who hold the voting securities under the offer.

Commonly, securities will be held by a custodian as nominee on behalf of the beneficial owners of those securities. As a holder of securities, a custodian is deemed to be an offeree by the Code.

Acceptances tendered by a custodian on behalf the beneficial owners have been subject to scaling at the custodian’s level of holding. This had created distortions in the scaling of the acceptances if a custodian held securities on behalf of multiple beneficial owners.

To address this problem, the offeror must now look through the holding of a custodian and treat the underlying beneficial owners as if those owners hold securities directly in the target company. The custodian must provide a certificate to the offeror and the administrator of the target company’s share register that sets out how the custodian’s clients have accepted the offer. This will ensure that the scaling of acceptances is accurate and fair. This change will incorporate into the Code a class exemption that was granted by the Panel in 2011 (which will be revoked when the amendments come into force).

Where an acquisition or allotment of shares must be approved by the shareholders of the Code company under rules 7(c) or 7(d), a notice of meeting must be sent to the shareholders that includes the information required by rule 15 (for an acquisition) or rule 16 (for an allotment). Some minor changes will be made to improve the efficiency of this procedure by the amendments.

Change to the definition of “equity securities” and “voting right” (clause 4)

Rules 7(c) and 7(d) apply, respectively, to acquisitions or allotments of “voting securities in [a] Code company or any other body corporate”. However, the Code defines voting securities in such a way that it includes only securities issued by companies registered under the Companies Act 1993. This is a drafting anomaly. The definition of “voting right” (and the related definition of “equity security”) will be amended to extend its application to other forms of bodies corporate.

Identity of upstream acquirer or allottee of voting securities (clauses 10, 11)

The notice of meeting must disclose the identity of the person acquiring voting securities (rule 15(a)) and, in the case of an allotment, the identity of the allottee (rule 16(a)). This means that only the holder of the securities needs to be stated.

Rules 15(a) and 16(a) will now contain the further requirement that the identity of any person increasing their control in the Code company is also disclosed in the notice of meeting.

Stating potential maxima in the notice of meeting (clauses 12, 35)

Rule 16(b) prescribes the particulars that a notice of meeting must contain about an allotment for the purposes of rule 7(d). The Panel has granted numerous exemptions from this requirement in cases where it was not possible for those particulars to be ascertained at the time that the notice of meeting was prepared. The Panel’s exemptions enabled notices of meeting to state the potential maximum number and percentage of securities that could be allotted to the allottee. The Panel granted a class exemption in 2010 to cover the most common transactions that needed exemptions from rule 16(b).

The Code will now be amended to permit a notice of meeting to state potential maximums provided that the assumptions on which those maximums are calculated are clearly disclosed and certain other disclosures are made in the Code company’s annual report and its website. The previous class exemption will be revoked.

Offer conditions and defensive tactics (clauses 15, 20)

Rule 25(1) provides the offeror with broad discretion to include conditions in the offer (although self-defeating conditions are banned).

The directors of target companies are prohibited from taking any action that could effectively defeat a takeover offer. To trigger a condition of the offer, even if the directors do not intend to do anything defensive, could breach this prohibition because it would enable the offeror to withdraw its offer. This can be a problem where conditions restrict the target company from conducting its ordinary business.

This imbalance will be addressed with amendments to rule 25 of the Code to reflect the following:

(a) An offeror cannot rely on a condition of an offer that seeks to restrict the target company from undertaking activities in the ordinary course of its business during the offer period. This change will incorporate into the Code what is already standard market practice; and 

(b) An offeror cannot rely on a condition of an offer unreasonably.

Statements by the offeror of its intentions for the Code company (clause 31)

Clause 14(1) of Schedule 1 of the Code requires the offeror to include in the offer document a statement as to the general nature of any material changes likely to be made by the offeror in respect of the business activities of the target company and its subsidiaries.

Clause 14(1) will be replaced with a provision that requires the offeror to make more detailed disclosure of its intentions in respect of the target company. The offeror will be required to disclose its intentions regarding any material changes to the business activities, assets, and capital structure of the target company. The offeror will also be required to state that the information provided in the offer document is consistent with information given by the offeror to other regulators (such as the Overseas Investment Office or the Commerce Commission).

A statement will not be required if the offer contains a non-waivable 90% minimum acceptance condition.

Definitions of offeror and offeree (clauses 4, 17)

The definition of “offeree” will be amended to clarify that an “offeree” includes a person who holds securities in a target company that has received a takeover notice as well as a person who has formally received an offer under the Code. This will remove drafting inconsistencies in the procedural rules in Part 6 of the Code (e.g., rule 43B refers to the “offerees” who must be sent an offer document, even though those persons would not have received an offer). A corresponding amendment will also be made to the definition of “offeror” so that it includes a person who has issued a takeover notice.

Availability of annual reports by electronic means (clause 33)

A drafting change will be made to the Code to capture the possibility that the target company may provide its annual report, in accordance with its obligations under the Companies Act, and, in the case of listed companies, the NZX Listing Rules, by electronic means.

Disclosure of trading where securities held by a custodian (clause 32)

Clauses 6(1)(b)(ii)(A) and (B) of Schedule 2 of the Code require the target company to disclose (to the best of its knowledge) all trading in the target companies equity securities by persons holding or controlling 5% or more of the target company securities, in the six months prior to the date of the target company statement. The purpose of this provision is to inform the offerees and the market of any dealings in the target company’s equity securities by the significant shareholders in the months leading up to the takeover.

A proviso to the disclosure obligation in clause 6 of Schedule 2 of the Code will be added to exclude disclosure of transactions by professional custodians where the beneficial owners control less than 5% of the target company securities. The amendment will ensure that target company statements contain only share trading data in respect of the “true” substantial security holders, and not data on the transactions by beneficial owners that control less than 5% of the target company securities.

Variation of offer document (clause 20)

Under rule 44(3) of the Code, an offer document may be varied from the draft offer that accompanied the takeover notice to include additional classes of securities without the offeror having to obtain the prior consent of the directors of the target company in limited circumstances.

Rule 44(3) will now allow new information that becomes available about classes of securities to be included in the offer. This enables the offeror to vary its offer, and obtain an amended report from an independent adviser on the fairness of the offer, for any class or classes of securities in respect of which the offeror has obtained additional information as a result of the Code’s class notice procedure.

Status of defeating conditions and extending the offer period (clauses 14, 25)

It is a significant event in the course of a takeover offer for the offeror to obtain a sufficient level of acceptances to satisfy the minimum acceptance condition, or, similarly, if the offeror elects to waive a minimum acceptance condition. It may alter the views of the directors of the target company and of the offerees as to the merits of accepting the offer. In the Panel’s experience, such an event can occur even at the “last minute” of the offer period, which leaves the offerees with very little time to consider the effect of the change in circumstances.

To address concerns, new rules will be added to the Code to provide:

(a) The offer period will be automatically extended if the minimum acceptance condition is satisfied or waived in the period that begins seven days before the end of the offer period. The extension is for 14 days from the date that the condition is satisfied or waived. This would ensure that offerees would have enough time to consider the satisfaction of the minimum acceptance condition; and 

(b) a requirement for the offeror to give notice of the status of defeating conditions at least a week before the close of the offer period. The notice will be sent to the target company, the Panel, and to the registered exchange (if the target company is listed).

Rule 35 dispositions (clause 16)

Currently, rule 35 prohibits a person who acts jointly or in concert with an offeror from accepting the offeror’s offer. The Panel has granted a number of exemptions from this rule (mostly in cases where an existing shareholder uses a special purpose vehicle to make a takeover offer). Rule 35 will be amended to clarify that persons acting jointly or in concert with an offeror may accept the offeror’s offer. As such, exemptions will no longer be required.

Drafting anomalies

The amendments will also remove several drafting anomalies and inconsistencies in the Code.