Be careful with the Code if you hold shares through different entities

Published 21 September 2020

The Panel reminds market participants that they need to consider the position of associates when calculating the holding or control of voting rights (Voting Control) for the purposes of rules 6(1) and 7(e) of the Code.

Rule 6(1) sets out the fundamental rule of the Code. It states: 

  • Except as provided in rule 7, a person who holds or controls—
    • no voting rights, or less than 20% of the voting rights, in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company unless, after that event, that person and that person’s associates hold or control in total not more than 20% of the voting rights in the code company:
    • 20% or more of the voting rights in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company.

Rule 7(e) sets out one of the exceptions to the fundamental rule. It states:

A person may become the holder or controller of an increased percentage of the voting rights in a code company—

  • if—
    • the person holds or controls more than 50%, but less than 90%, of the voting rights in the code company; and
    • the resulting percentage of the total voting rights in the code company that is held or controlled by the person does not exceed by more than 5 the lowest percentage of the total voting rights in the code company that was held or controlled by the person in the 12-month period ending on, and inclusive of, the date of the increase[.]

Where a person seeks to increase their Voting Control of a Code company, their Voting Control is aggregated with that of their associates in order to calculate the post-increase Voting Control limit of 20% referred to in rule 6(1)(a).

For example:

Person Y has Voting Control of 10% in a Code company, ABC Limited. Person Z has Voting Control of 52% in ABC Limited. Persons Y and Z are associates under the Code. Another shareholder wishes to sell voting securities equivalent to 2% Voting Control in ABC Limited.

Person Y cannot acquire the 2% without breaching rule 6(1)(a) absent an exemption, or unless one of the exceptions in rule 7 applies. This is because, after the increase, the total Voting Control held by Person Y and their associate, Person Z, will be 64% - this is in excess of the 20% post-increase limit set out in rule 6(1)(a).

The Voting Control of associates cannot be aggregated for the purpose of reliance on rule 7(e). Applying this to the example above, Person Y cannot aggregate their Voting Control with Person Z to acquire the 2% in reliance on rule 7(e). Person Y’s Voting Control is 10% prior to the increase, which does not meet the requirements of rule 7(e)(i). Person Y’s Voting Control cannot be calculated in aggregate with that of Person Z to reach a figure of 62% prior to the increase, for the purposes of rule 7(e)(i).

Assuming that there has been no change in the Voting Control of Person Z over the previous 12 months, Person Z alone may rely on rule 7(e) to acquire the 2%. This is because:

  • Person Z (with 52%) has more than 50% but less than 90% Voting Control prior to the increase; and
  • the resulting Voting Control of Person Z (54%) is within the 5% creep limit allowed under rule 7(e).