Amended Takeovers Code Released

Charles Bolt | July 2000

Amended Takeovers Code heralds fundamental changes to the rules. Submissions on the Code are sought by 21 July 2000.

Introduction

The Government has announced on several occasions its intention to introduce a Takeovers Code. The Takeovers Panel released an amended Takeovers Code on 30 June 2000. The Panel is seeking submissions on the Code by 21 July 2000. The Panel has retained the general policy of the 1995 Code (which was recommended to the previous Government but not adopted). This newsletter contains a very brief summary of the key elements of the proposed Code.

General Comments

The Takeovers Code will fundamentally change the rules relating to takeovers in New Zealand. Some of the significant implications of the Code are:

• shareholders could be forced to make a takeover offer when their percentage holding is increased by actions outside their control e.g. non-pro rata share buy back.
  
  
• a typical "due diligence" condition which has become relatively common in takeover offers will no longer be permitted.
  
  
• independent advisers' reports will be required in respect of all takeover offers.
  
  
• target company shareholder approvals may authorise an offeror to depart from the normal offer requirements.

There are a number of aspects of the Code that require careful consideration. Some elements of the Code could cause practical difficulties.

As a firm we will be reviewing the Code with a view to making submissions to the Panel before the 21 July deadline.

Code Companies

The Code applies to "code companies" which are:

• companies which are listed on the New Zealand Stock Exchange ("NZSE"); or
  
  
• companies which were listed on the NZSE and have ceased to be listed for less than 12 months; or
  
  
• companies which have 50 or more shareholders and $20 million or more of assets.

Fundamental Rule

The Code contains a fundamental rule preventing a person (and that person's associates) from increasing percentage voting rights across or above a 20% threshold in a code company unless that increase occurs in one of several permitted ways (called "compliance options"). The Commerce Minister announced recently that the proposed 20% threshold in the Code will not be negotiable.

• Increases crossing the 20% threshold
  
  A person who holds or controls no voting rights or less than 20% of the voting rights in a code company may not (except through a compliance option) become the holder or controller of an increased percentage of voting rights unless, after the increase, the person and its associates hold or control not more than 20% of the voting rights; and
  
  
• Increases above the 20% threshold
  
  A person who already holds or controls 20% or more of the voting rights in a code company may not (except through a compliance option) become the holder or controller of an increased percentage of the voting rights.

Compliance Options

The compliance options under which a person may become the holder or controller of an increased percentage of the voting rights in a code company are:

• Full offer
  A full offer may be made for all the voting securities of the target company. Such an offer must extend to all equity securities (whether voting or non-voting). If there are different classes of securities the full offer must be fair and reasonable as between the different classes.
  
  
• Partial offer
  A partial offer is permitted but it must be extended to all holders of voting securities in the target company and must be for a specific percentage of each holder's securities. If the offeror's existing holding is 50% or less, the offer must be for securities which will result in the offeror holding more than 50% of the voting rights. A partial offer can be made for a lesser percentage if a written approval procedure is followed and is successful.
  
  Partial offers do not need to extend to non-voting securities. If there are different classes of voting securities a partial offer must be fair and reasonable between the classes and must be made for the same percentage of each class.
  
  
• Acquisition or allotment with shareholder approval
  A specific purchase or issue of equity securities approved by the shareholders of the target company in a shareholders meeting is permitted. Interested parties cannot vote on the resolution to approve such a purchase or issue.
  
  
• 5% creep in 50% to 90% range
  A person holding or controlling more than 50% but less than 90% of the voting rights in a company can increase that holding by up to 5% of the total voting rights in the company in any twelve month period. The maximum increase permitted is calculated from the lowest percentage the person held or controlled in that twelve month period.
  
  
• Acquisition by a person holding 90% or more
  A person who holds or controls 90% or more of the voting rights in a code company can increase that holding without restriction.

No Exceptions for "Involuntary" Increases

The Code does not contain any exceptions for increases which cross or are above the 20% threshold and which may be beyond the control of the holder whose holding increases. The fundamental rule may therefore be breached by various "involuntary" actions, for example, a non-pro rata share buy back, a rights issue which is not fully subscribed, the operation of a dividend reinvestment plan under which all holders do not elect to participate, etc. The Panel will, hovever, have power under the Takeovers Act to grant exemption from the code.

Other Important Features of the Code

• Same offer to all
  Any offer made under the Code must be made on the same terms and offer the same consideration for all securities in a class.
  
  
• Independent advisers' reports
  The Code requires the directors of the target company to obtain a report from an independent adviser on the merits of an offer.
  
  Additional independent advisers' reports on fairness between classes must be obtained by an offeror if offers are made for more than one class of security.
  
  
• Minimum acceptance condition
  An offer by a person entitled to less than 50% of the voting rights in the target company must be conditional on the offeror obtaining acceptances which will bring the offeror's total holding to more than 50%.
  
  
• Offer period
  An offer must be open for at least 30 days and not more than 90 days. A full offer can be extended by up to a further 60 days if it is not conditional on any minimum level of acceptance, or if the minimum level of acceptance has already been satisfied.
  
  
• Some conditions prohibited
  Offers may not be subject to conditions which depend on the judgement of the offeror or any associate of the offeror or the fulfilment of which is in the power or under the control of the offeror or any of its associates.
  
  
• Offer procedures
  The Code sets out requirements for a takeover notice to be given to the target company. The Code also details the information that must be included in an offer and in the response from the target company.
  
  
• Variation and withdrawal of offer
  The Code limits the ways in which an offer can be varied and the circumstances in which an offer can be withdrawn.
  
  
• Compulsory acquisition
  The Code contains compulsory acquisition provisions under which a 90% holder may acquire the outstanding equity securities in the target company.