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The Takeovers Code has significant implications for all investors

31 October 2008

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This article was first published in October 2000.

A protracted economic, public policy and legal debate over more than two decades about the appropriate level of takeover regulation for New Zealand culminated in approval in October 2000 of a Takeovers Code (“Code”), recommended by the Takeovers Panel (“Panel”), under the Takeovers Act 1993 (“Act”), for commencement on 1 July 2001.

This edition of Counsel outlines the key features of the Code, and explains what it means in practice.

Key features of the Code

Code Companies

The Code currently applies to:

  • companies which are, or in the previous 12 months have been, listed by NZX Limited, and
  • unlisted companies with more than 50 shareholders.

Due to shortcomings in similar definitions in the Act, the Code does not clarify when the number of shareholders is to be counted, or how joint shareholdings should be counted. Neither the Act nor the Code currently applies to other listed entities, such as unit trusts and group investment funds.

The Fundamental Rule

The core of the Code is the “fundamental rule” which prohibits a person becoming the holder or controller of voting rights in a Code company if it and its “associates” would afterwards control more than 20% of the voting rights, unless the increase fits within one of the exceptions to the fundamental rule or the Panel grants an exemption. If a person already holds more than 20%, it (and its associates) cannot become the holder(s) of an increased level of voting rights except in compliance with the Code or through an exemption.

The term “associate” is very widely defined. For example, a person is an “associate” of another if it “has a business relationship, personal relationship, or an ownership relationship such that they should, under the circumstances, be regarded as associates”.

Exceptions to the Fundamental Rule

The permitted methods of increasing the holding or control beyond the 20% threshold are:

  • Full Offer: A full offer can be made for all voting securities of the target company as well as any non-voting equity securities on issue. If the target company has different classes of securities the full offer must be fair and reasonable between different classes.
  • Partial Offer: A partial offer (for less than 100%) is permitted but must be extended to all holders of voting securities (non-voting securities can be excluded) and must be for a specific percentage of each holder’s voting securities. Again, if there is more than one class of voting securities, the partial offer must extend to each class. If the offeror’s existing holding (together with associates) is 50% or less, the offer must be for securities which will result in the offeror holding or controlling more than 50% of the voting rights. However, a partial offer can be made for a lesser percentage if a written approval procedure is followed and is successful. If excess acceptances of an offer are received, the acceptances must be scaled back proportionately.
  • Shareholder Approval: A specific purchase or issue of equity securities may be approved by shareholders in the target company by an ordinary resolution (simple majority of shareholders voting on the issue) but the persons acquiring and disposing of the securities may not vote on the proposal.
  • Limited 5% creep: A person holding or controlling more than 50% but less than 90% of the voting rights can increase their holding or control by up to 5% of the total voting rights in the company in any 12 month period. Unlike some other countries’ codes, the “creep” provision does not apply to holders with less than 50% - there is a “no fly zone” between 20% and 50%.
  • Compulsory Acquisition: Acquisitions by persons holding or controlling 90% or more of the voting rights can increase that holding without restriction - a “free fly” zone. In addition, above the 90% threshold the holder may compulsorily acquire the remaining securities and may be required to acquire the securities of remaining holders.
  • Exemptions: The Panel has a power to grant individual or class exemptions from the Code, largely to permit inadvertent or unintended breaches of the Code. For example the Panel has granted class exemptions to facilitate pro rata rights issues, dividend reinvestment schemes, enforcement of lender security rights, proxy holders, transfers by operation of law such as beneficiaries of wills, intra group transfers, common nominee holders, and share buybacks, where the 20% threshold might otherwise be inadvertently breached.

On-market acquisitions over the 20% threshold are largely curtailed, because no "creep" is possible in the 20% to 50% no fly zone, only 5% per year is possible between 50% and 90%, and shareholders may only approve exceptions if the purchaser is specifically identified (which is not possible in an on-market acquisition).

Offer rules and other Code requirements

The Code contains detailed requirements for partial offers and full offers, and other requirements which include:

  • Disclosure documents: Detailed provisions specified in the schedules to the Code for both the offeror and the target company board specifying the contents of the offeror’s takeover notice and the target company’s statement in response. These requirements go well beyond the requirements of the existing regime.
  • Same terms and conditions: An offer must be on the same terms and conditions, including the same consideration, to all holders of securities of the same class. This requirement should substantially remove the ability to pay a “premium for control” above the 20% threshold. However, unlike in other countries, there is no “relation back” requirement under which the offer price must be no lower than the highest price paid for acquisitions below the 20% threshold during previous periods. There is therefore still a limited ability to pay a “premium for control” below the 20% threshold.
  • Independent adviser reports: The Code requires directors of the target company to obtain a report on the merits of an offer from an adviser whom the Panel considers is independent and has approved. Independent adviser reports are also required to address fairness between classes, where an offer is made for more than one class of security, and to accompany a notice of meeting for any shareholder approval for an increase of control of voting rights.
  • Offer period: The offer must be open between 30 and 90 days, although a full offer can be extended up to 60 days if it is not conditional on a minimum level of acceptance, or minimum acceptance conditions have been satisfied. These requirements should curtail “open ended” offers.
  • Minimum acceptance condition: Where the offeror holds or controls less than 50% of the voting securities, the offer must be conditional on receiving acceptances which will bring the offeror’s total holding above the 50% threshold, unless it is a partial offer and shareholder approval for a lesser percentage is obtained.
  • Self-defeating conditions prohibited: Although an offer can be conditional, the conditions cannot depend on the judgement of the offeror or be within its power or control. This requirement is intended to prevent offers being conditional on subjective “due diligence”.
  • Variations: The Code does allow offers to be varied to increase the consideration or to add a cash component to the consideration. If the offer is varied, the variation must apply to all offerees, whether or not they have already accepted. This is a major change from present practice in New Zealand.
  • Defensive tactics: The Code restricts tactics by the target company directors which might "frustrate" an offer, except in limited circumstances. The drafting of this provision is extremely wide and does not specify what types of action are restricted.

 

The permitted methods of takeover can be summarised as follows:

Hold or Control Increase

Method of permitted increase

0-20%

Any means

20% to 50% (no fly zone)

Full offer
Partial offer
Shareholder approval
Exemption

50% to 90%

Full offer
Partial offer
Shareholder approval
5% creep in 12 months
Exemption

Above 90% (free fly zone) Any means
Compulsory acquisition rules

Consequences of getting it wrong

If the Code is not complied with, the offeror is not automatically required to make a bid for all voting securities in the Code company.

The Act gives the Panel a limited power to make restraining orders preventing an acquisition, or suspending the right to vote securities acquired in breach of the Code, for a period of up to 21 days or compliance orders requiring correction, or prohibiting distribution, of misleading statements made in connection with a takeover. Otherwise, the remedy for
non-compliance with the Code is to apply to the High Court, which has power to grant much wider orders restraining conduct, directing the sale of securities or controlling the exercise of voting rights. But the Court cannot compel the party in breach to make a full offer.

The Court may also excuse contravention where the breach was inadvertent, and the Panel may grant retrospective exemptions. Although the Act does provide for the Court to impose financial penalties for a contravention of the Code, these penalties could be mitigated, at least in an inadvertent breach, by the offeror selling down below the applicable threshold breached.

The reliance in the Act on High Court proceedings for most remedies is a departure from other countries where the Panel has much greater power to enforce compliance with the Code, particularly during the offer period.

Although the Panel is not able to make binding interpretations on the Code, except through its formal determinations, the Panel has published a number of guidance notes, policy statements and other useful information on its website www.takeovers.govt.nz.

The Act gives the Panel a limited power to make restraining orders preventing an acquisition, or suspending the right to vote securities acquired in breach of the Code, for a period of up to 21 days or compliance orders requiring correction, or prohibiting distribution, of misleading statements made in connection with a takeover.

Differences from Australian takeover requirements

The Act required the Panel to have regard to (but not necessarily copy) Australian takeover law, when recommending a takeovers code. Although many elements of Australian law are found in the Code, there are some key differences between the Code and Australian requirements.

The Australian Corporations Act:

  • applies to all Australian listed entities (including unit trusts) and all companies with more than 50 shareholders. It is clear that joint shareholdings are treated as one shareholder
  • does not require a partial bid to be conditional on at least 50% acceptance (a lower threshold can be achieved as long as acceptances are proportionately scaled)
  • contains a “relation back” requirement, under which the consideration offered in a takeover may be not less than the value of consideration offered for acquisitions in the previous four months. The effect of this requirement is to reduce the ability to pay a “premium for control” for acquisitions below the 20% threshold
  • contains detailed rules prohibiting selective “collateral benefits”, such as price ‘escalation’ agreements, pre-bid or under an offer. The New Zealand Code does not contain similar restrictions
  • permits on-market acquisitions above the 20% threshold through a general on market offer procedure open for at least one month
  • permits a 3% “creep” in any six month period (and is not restricted to above 50%)
  • confers on the Australian Takeovers Panel wider remedies and jurisdiction to regulate the conduct of bids and board responses. In contrast to New Zealand, the Court has a relatively minimal role, particularly during the bid period.

 

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