Global takeover activity has risen sharply in recent years, and the number and value of reported New Zealand transactions has increased significantly. As directors, you are ever more likely to encounter takeover bids and boards should prepare themselves now to react speedily if they arise.
The legislative environment in this context is also in flux. Amendments to takeovers legislation (which have been enacted and are expected to take effect by order in council later this year) will affect the manner in which you can respond to takeover activity and your obligations as directors of target companies.
This article is a refresher on the principal duties of target company directors during a takeover. It also provides a brief update on the forthcoming legislative changes.
The general directors’ duties imposed by the Companies Act apply in takeover transactions. These duties include to:
- exercise powers and perform duties with the level of care and skill that a reasonable director would observe in the circumstances
- act in good faith and in the best interests of the target company, and
- exercise powers for their proper purpose and for the advantage of the target company.
Duties under the Takeovers Code
If the Code applies to the a takeover (which will be the case for any listed company, and any privately held company with 50 or more shareholders), directors of the target company must also:
- ensure that the company complies with the deadlines prescribed by the Code. Such deadlines arise soon after receiving a takeover notice – for instance, the target company must send a class notice, describing the equity securities on issue in the target, to the offeror no later than two days after receiving the takeover notice
- oversee the preparation of a target company statement, and
- ensure that the target company statement includes all information which would reasonably be expected to be material to a shareholder’s decision to accept or reject the offer.
In practical terms, directors should ensure that information provided to shareholders is comprehensive, current and intelligible.
Although directors must have regard to the interests of offeree shareholders, there is no obligation to put the target company "into play" and solicit alternative bids. However, this may well be considered to be in the best interests of the company and, if there is a reasonable prospect of a competing bid, directors should make the offeree shareholders aware of that prospect.
The Oyster Bay Marlborough Vineyards Limited litigation is a recent reminder of the serious consequences of producing an inadequate target company statement. There, the target company statement included valuations which had been superseded shortly before drafting the target company statement. In addition, the directors valued the target company’s assets on an "encumbered" basis for the purposes of the target company statement. They failed to disclose the "unencumbered" valuation, which was significantly higher.
As a result, the court regarded the target company statement as defective and exercised its discretion to avoid the contracts which had been formed upon the shareholders’ acceptance of the takeover offer, effectively requiring the process to start afresh.
The Code contains a broad prohibition against "defensive tactics". Where a target company has received a takeover notice – or has reason to believe that an offer is imminent – its directors must not take, or permit, any action which could result in an offer being frustrated or shareholders being deprived of an opportunity to consider the merits of the offer.
Conduct likely to infringe the prohibition includes disposing of significant assets or varying key contracts to include change of control provisions, in each case when the directors of the target anticipate receiving a takeover offer. Complying with existing contractual obligations or matters approved by shareholders is of course permitted.
Key points to note in relation to the prohibition are:
- there are a number of exceptions, in respect of which advice should be obtained
- soliciting alternative offers is not prohibited
- liability for defensive tactics is strict; conduct that inadvertently frustrates an offer can contravene the prohibition, and
- as the prohibition applies to passive acquiescence to defensive tactics, it can obligate directors to positively "stamp out" infringing conduct of others.
Truth in takeovers
The "truth in takeover" amendments will, once effective, extend the Takeover Panel’s jurisdiction to communications made outside the formal documentation required by the Code. The amendments recognise that such communications often determine the result of takeover contests. The "truth in takeover" provisions become operative by order in council, which is expected to be made later this year.
The amendments prohibit:
- misleading and deceptive conduct in takeover contexts; and
- making statements or disseminating information which the person knows, or ought to know, is misleading or false (in whole or in a material respect) and is likely to either:
- induce a person to hold, or trade in, securities of a Code company; or
- increase, reduce, maintain or stabilise the price for trading in such securities.
Once the amendments are operative, directors will need to closely scrutinise all media and other communications. While primarily aimed at acquirers, the provisions will also extend to the target company and its directors. A potential risk area for directors will be statements of personal intention in respect of the offer. For instance, if a director with a significant shareholding signals an intention to sell, any later contradictory statement could expose the director to allegations of having made a false statement.
The Securities Markets Act
The insider trading and tipping rules under the Securities Markets Act can impact the ability of a company or its directors to provide information or advice to potential acquirers.
Although the Securities Markets Act protects insiders who purchase securities pursuant to a Code compliant offer, there is presently no takeover-specific protection from liability for tipping. This has been a concern for some time, however it is possible to set up procedures to ensure Securities Markets Act compliance.
Amendments to the Securities Markets Act
Amendments to the insider trading laws are expected to take effect later this year. These amendments provide certain exclusions from the insider trading provisions and will create greater scope for pre-bid disclosures in connection with prospective takeover bids and encouraging alternative offers.
Many of these new exclusions will only apply if the recipient of the inside information is subject to a confidentiality agreement and if the purpose of the disclosure is to encourage or enable the recipient to make, or participate in, a takeover offer.
NZSX Listing Rules
For listed target companies, the continuous disclosure requirements can be relevant. However, provided that it is kept confidential, there is typically no need to disclose an initial approach by a prospective offeror seeking information about the target. The duty to disclose arises where the offer becomes more developed or where confidentiality is not maintained.
Takeover transactions can present an unfamiliar situation for directors, requiring a quick response under substantial commercial and time pressures. These pressures are increasing as takeovers are more frequently subject to media scrutiny.
Obtaining advice at an early stage can help directors achieve compliance with the tight timeframes and with the evolving legal requirements. Boards who wish to be prepared for a takeover scenario should:
- have an understanding of the value of their company against which any takeover offer can be assessed
- agree upon the procedures and any sub-committees that will apply if the company comes into play, and
- identify suitable advisers in respect of potential takeover transactions.