CODEWORD

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).

The Panel has granted the Takeovers Code (Voting Agreements for Schemes of Arrangement) Exemption Notice 2020 (the Class Exemption) in respect of voting agreements in relation to schemes of arrangement.

The Class Exemption permits shareholders who wish to commit to voting for or against a scheme to do so, even where this results in a person enforcing the voting commitment to have control  of more than 20% of the voting rights in the Code company. This should remove the need for the previous practice of shareholders providing statements of intention.

The Panel has recently updated a number of Guidance Notes.  Available on the Panel’s website are the updated versions, as well as compare versions showing all updates, of the following Guidance Notes:

• Schemes of Arrangement
• Lock-up Agreements
• Exemptions
• Creeping Acquisitions

In summary:

• The Guidance Note on Schemes of Arrangement has been updated to reflect the following:
  • The new class exemption the Panel has granted in respect of voting agreements in relation to schemes of arrangement.
  • There are schemes where the change in the holding or control of voting rights in a Code company is so immaterial that section 236A of the Companies Act does not apply. An example of this may be where there is only a change in the voting rights as a result of rounding to an insignificant decimal point. To illustrate this point, Tilt Renewables Limited’s recent pro-rata return of capital by cancellation of shares under a scheme has been included as a reference. In this case, there was no change in the relative voting control of shareholders when control percentages were rounded to the 8^th decimal point, and the Court decided that section 236A did not apply to the scheme.
• Cross-references have been included in the Guidance Note on Lock-up Agreements to the relevant material in the Guidance Note on Schemes of Arrangement for additional clarity.
• The Guidance Note on Exemptions has been updated to:
  • clarify that, at the present time, whilst the Panel may defer publication of an exemption notice on its website and notification of an exemption in the Gazette on the grounds of commercial confidentiality, the exemption notice must still be presented to the House of Representatives within 16 sitting days after the notice has been signed. However, there is a bill before Parliament that includes an amendment which provides an exemption from this obligation on the grounds of commercial confidentiality. We will update the market once this bill has been passed.
  • reflect the new class exemption for voting agreements in relation to schemes of arrangement. It exempts, from rule 6(1) of the Code, persons and their upstream parties, who may enforce a voting commitment to vote for or against a scheme of arrangement. The class exemption, which takes effect from 21 September 2020, is subject to certain conditions.
• The Guidance Note on Creeping Acquisitions has been updated to include new guidance and examples of the calculation of the holding or control of voting rights for the purposes of rule 6(1) and 7(e) of the Code. This updated material is from the article “Be careful with the Code if you hold shares through different entities” in this issue of CodeWord.

In March 2020, the Panel granted temporary class exemptions from the Code aimed at assisting Code companies in raising capital. These exemptions expire on 31 October 2020.

The Panel will be making an assessment on whether to extend these exemptions. We encourage Code companies and market practitioners to get in touch if they would like to provide feedback in relation to the need (or lack of need) for an extension.

Please submit your feedback to Mark Cunliffe, General Counsel, before 30 September 2020.

The Panel has updated its payment policy and is no longer accepting cheques as a method of payment for its fees (including application fees). Instead, all fees will be invoiced monthly or at the conclusion of the Panel’s work on the application. Any application fees applicable will be included in the first invoice.

If you have questions regarding this update to the payment policy, please contact the Panel executive.