CODEWORD

Rules 14A to 14E of the Code deal with the scaling of excess acceptances of a partial takeover offer where voting securities in the target company are held by a person on behalf of another person or persons. The rules were introduced into the Code on 1 June 2013 and effectively enable the offeror to “look through” the holder of the securities to the beneficial owners for the purposes of scaling acceptances. This means that the scaling occurs at the ‘owner’ level, not at the level of the holder.

A key component of the rules is that a specified holder must provide a certificate that complies with rule 14D to the offeror and the person who administers the target company’s share register. A specified holder is defined by rule 14A as:

…an offeree under a partial offer who holds target securities [i.e., voting securities in the target company] on behalf of more than 1 specified person, regardless of – (a) whether the holdings are direct or indirect: (b) whether the holder is a custodian or not: (c) the particular arrangements between the specified holder and specified persons.

A specified person is a person on whose behalf a specified holder holds target securities.

At first glance, it can appear that these definitions cover even ordinary family trust arrangements. However, they are not captured by the definitions. Trustees of a discretionary family trust who hold target securities in their capacity as trustees do not normally hold particular target securities for particular beneficiaries. A discretionary trust is usually established for the benefit of a class of persons (e.g., the family of the settlor) and the trustees, subject to the terms of the trust deed, retain control over the assets of the trust, such as target securities.

The trustees of a common family trust in respect of which the beneficiaries are discretionary are not required to provide a rule 14D certificate if they accept the offer.

A careful reading of these new requirements shows that the rules are intended to cover nominee and custodian arrangements, such as where an investment manager holds multiple beneficial owners’ share portfolios, and not ordinary discretionary family trusts. For example, rule 14D requires the specified holder to complete a certificate that states the number of specified persons that have accepted the offer along with the number and class of target securities held by the specified holder on behalf of each such specified person.

Guidance by offeror for family trusts

The trustees of a common discretionary family trust are not required to provide a rule 14D certificate when they accept a partial takeover offer. The Panel suggests that guidance along the following lines should be stated in offer documents for partial offers to ensure that offerees are clear about their obligations when they accept:

The trustees of a common family trust in respect of which the beneficiaries are discretionary are not required to provide a rule 14D certificate if they accept the offer. However, if the trust arrangements are such that separate beneficiaries of the trust can direct the trustees as to whether to accept the offer for that beneficiary’s portion of the shares, then a rule 14D certificate must be provided if the offer is accepted.

In February 2014, the Panel granted an exemption that enabled SFL Holdings Limited (a subsidiary of Shanghai Pengxin Group Co Limited) to extend the final date by which a statutory approval condition in its takeover offer for shares in Synlait Farms Limited had to be satisfied.^[1] It is rare that the Panel grants an exemption from the Code’s timing rules and this note explains the Panel’s reasons for its decision to grant the exemption.

The context for the Panel’s decision

The Panel has the power under section 45 of the Takeovers Act 1993 to grant exemptions from compliance with the Code. The Code is broad in its effect and in some cases can have unintended consequences or may not adequately provide for unusual circumstances.

The Panel’s exemption power is not intended to facilitate a transaction structure that does not comply with the Code, or to achieve a particular commercial outcome or benefit. The Panel, in deciding whether an exemption is appropriate, considers whether compliance with the Code is possible and whether compliance would create an inappropriate, unreasonable or unintended result.

Further, the Takeovers Act requires that the Panel’s reasons for granting an exemption must be stated and include (a) why it is appropriate that the exemption is granted, and (b) how the exemption is consistent with the objectives of the Code.

In the Synlait Farms situation, the Panel considered the policy in rules 25(3A) and 25(4) of the Code. These rules provide that conditions of an offer must be satisfied by a specified date that must not be later than 14 days, or, if the acquisition requires statutory approval, 30 days, after the end of the offer period. If an offer is not unconditional by the specified date, then the offer lapses. The Panel also considered the policy of rule 24B, which allows an offer period to be extended for up to 60 days beyond the usual maximum offer period if the offer was subject to a minimum acceptance condition, and that condition is satisfied or waived before the end of the offer period.

The Panel noted that a takeover can draw heavily on a target company’s resources and that shareholders should not be unfairly constrained from disposing of their shares outside of a takeover offer. The timing rules balance the need to limit the period of a takeover offer with the need to allow shareholders sufficient time to make an informed decision about whether to accept or reject a takeover offer. Accordingly, the Panel does not consider lightly applications for exemptions from those timing rules.

Background on the Synlait Farms offer

On 1 November 2013, SFL Holdings made an offer to acquire all of the shares in Synlait Farms. The offer was for $2.10 per share and included a price escalation clause whereby offerees would be paid an additional $0.001957 per share for each day from 1 January 2014 until the day that the offer was declared unconditional.

The offer was subject, among other things, to:

(a) a minimum acceptance condition that SFL Holdings received sufficient acceptances that would confer on it 90% or more of the total voting rights;

(b) a condition that the offer was approved by the New Zealand Overseas Investment Office (OIO); and

(c) a condition that the offer was approved by the relevant regulatory authorities in China.^[2]

The offer was initially due to close on 6 December 2013. On 21 November, SFL Holdings extended the closing date until 20 December. The minimum acceptance condition was satisfied on 26 November. The offer was extended again on 19 December with a new closing date of 29 January 2014.

The date by which the offer had to be declared unconditional in respect of any statutory approvals (under rule 25(3A) of the Code) was 28 February 2014. If the offer was not declared unconditional by that date, it would lapse and SFL Holdings would not be able to take up any acceptances. In other words, the offer would fail.

The offer closed on 29 January with SFL Holdings receiving acceptances in respect of 99.58% of the shares.

The OIO gave its approval of the takeover on 31 January 2014, but by 17 February it became apparent that the Chinese regulatory approval of the offer was unlikely to be given before 28 February. This would mean that the relevant condition would not be satisfied by the specified date for going unconditional, and the offer would fail. An urgent exemption was sought by SFL Holdings from rule 25(3A) to enable an extension of 30 days for the condition deadline.

Panel’s decision

The Panel met to consider the exemption application on 24 February 2014 and ultimately approved the granting of an exemption for SFL Holdings from rules 25(3A) and 25(4) of the Code to extend the deadline for going unconditional by 30 days.

The Panel concluded that the granting of the exemption was appropriate because of the particular facts of the takeover, including:

(a) the offer received an acceptance level of 99.58% by the time it closed, with a more than 90% acceptance level within the first 30 days of the offer;

(b) the Panel was advised by SFL Holdings that the extension would be sufficient time to satisfy the Chinese regulatory condition;

(c) the granting of the exemption was supported by the independent directors of the target company;

(d) the price offered under the offer was above the valuation range given in the independent adviser’s report;

(e) the offer was not hostile and there were no competing offers;

(f) a price escalation clause was included in the offer and, because of the price escalation clause, there was unlikely to be any prejudice to Synlait Farms’ shareholders as a result of an extension of up to 30 days to the deadline for going unconditional; and

(g) provided the offer became unconditional, it would be subject to the Code’s compulsory acquisition rules.

The Panel decided that the granting of the exemption was consistent with the objectives of the Code because:

(a) the Code recognised that obtaining regulatory approvals could take longer than the takeover offer period and allowed for this in rule 25(3A);

(b) although the Code stipulated a maximum offer period of 90 days, it also provided flexibility to offerors whose full offers were subject to a minimum acceptance condition by allowing up to an additional 60 days for the offer period under rule 24B, if that minimum acceptance condition had been satisfied or waived before the end of the offer period;

(c) the additional time period in rule 24B, which applies from the day on which the minimum acceptance condition was satisfied or waived, would have been available to the offeror but for the satisfaction of the offer’s 90% acceptance condition early in the offer period; and

(d) the benefit to Synlait Farms’ shareholders in granting an exemption, which kept the takeover viable in the circumstances of the offer, outweighed the benefit of strict compliance with the Code.

Concluding remarks

The Panel considers the timeframes set out in the Code provide a critical balance between ensuring takeover transactions do not drag out to the detriment of target companies and their shareholders and providing sufficient time to allow shareholders to make an informed decision about whether to accept a takeover offer. The Panel does not consider lightly applications for exemptions from those timing rules. However, from time to time circumstances arise that could mean that strict compliance with the timing rules could result in an inappropriate or unreasonable outcome, and an exemption may be granted.

If a person wishes to make a takeover offer under the Code, rule 41 requires that a takeover notice is sent to the prospective target company that contains, or is accompanied by, the information specified in Schedule 1 of the Code. Clause 5 of Schedule 1 requires that all the terms and conditions of an offer be stated.

Rule 41 does not refer to rule 44(1)(e) of the Code, which came into force on 1 June 2013. Rule 44(1)(e) requires that an offer must contain a term that the offeror may not allow the offer to lapse:

(i) in unreasonable reliance on a condition of the offer; or

(ii) in reliance on a condition of the offer that restricts the target company’s activities in the ordinary course of the target company’s business during the period that begins with the sending of the takeover notice and ends on the specified date referred to in rule 25(2) (or on the latest specified date referred to in rule 25(3A), whichever is later).

A number of draft offers accompanying rule 41 takeover notices are overlooking rule 44(1)(e) and not including the required term in the draft offer.

The Panel has been developing a transactions page on its website. The Panel’s intention is to record details about all Code transactions from this point in time, including links to the most relevant transactions documents. The Panel’s plan is to eventually include past transactions as well. In time, the Panel aims to grow a useful depository of information about, and documents relating to, Code transactions in New Zealand.

The transactions page can be found here.

The Panel executive monitors substantial holder notices on the NZX website for increases in the holding or control of voting rights by shareholders in listed Code companies.

From time to time, a substantial holder notice identifies an increase in the holding or control of voting rights that could, but for an exemption, be a breach of the Code. When the Panel executive sees such a notice, it will typically write to the party that has given the notice and ask for an explanation, because almost invariably there is no mention that an exemption has been relied on for the increase.

While reliance by a shareholder on a recently granted individual exemption is usually obvious, reliance on a class exemption is not usually apparent. Legal advisers can assist the efficient monitoring of Code compliance by stating in the substantial holder notice that the relevant increase in voting control is permitted under a particular class exemption.