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BEFORE THE TAKEOVERS PANEL
IN THE MATTER OF
the Takeovers Act 1993 and
IN THE MATTER OF a request received by the Takeovers Panel on 13 May 2004 from Rubicon Limited for the Panel to convene a meeting under section 32(1) of the Takeovers Act 1993 to determine whether the directors of Tenon Limited have contravened rule 38 of the Takeovers Code in relation to the partial takeover by Rubicon Forests Limited by declining to provide the confirmations required by conditions (4)(b) and (4)(c) of the offer within the stipulated time period, and stating publicly that they do not intend to provide information to an independent expert appointed by Rubicon Forests Limited in respect of conditions Rubicon Forests Limited has attached to its offer.
19 May 2004 at Auckland
J C King (Chairman)
B Stewart QC, J Strowger, A Ross and J Pringle appearing for Rubicon Limited
R Parker, representing Tenon Limited
21 May 2004
 Tenon Limited (“Tenon”) is a New Zealand incorporated company and is party to a listing agreement with the New Zealand Exchange Limited (“NZX”). As such, Tenon is a code company for the purposes of the Takeovers Act 1993 (“the Act”) and the Takeovers Code (“the Code”).
 On 8 April 2004, Rubicon Forests Limited (“Rubicon Forests”), a wholly owned New Zealand incorporated subsidiary of Rubicon Limited (“Rubicon”) (a New Zealand registered company listed on the NZX) gave notice under rule 41 of the Code of its intention to make a partial offer (under the Code) for shares in Tenon which it did not already hold to increase the Rubicon group's shareholding in Tenon to 50.01% (“the offer”).
 On 8 May 2004, Tenon sent its offer documents to the shareholders of Tenon, to Tenon and to the Takeovers Panel (“the Panel”). The offer is scheduled to close on 3 June 2004.
 On 12 May 2004, Tenon made a news release in which the Tenon independent directors recommended that shareholders do not accept the offer. That news release included the following statement under the subheading “The Offer creates uncertainty for shareholders”:
“Tenon's shareholders should take note of the 3 pages of conditions to Rubicon's Offer. These conditions are wide ranging and are likely to result in considerable uncertainty with respect to the outcome of the Offer. They include a number of conditions, which relate to the financing of the Rubicon Offer and information about the potential impact of the Offer on Tenon. In addition, Tenon's Independent Directors have advised Rubicon that they do not intend to provide Rubicon with any Directors' certification, or provide information to an “expert” appointed by Rubicon, in respect of conditions Rubicon has attached to its Offer.”
 On 13 May 2004, the Panel received a written complaint from Rubicon alleging that Tenon was acting in breach of rule 38 of the Code, which restricts defensive tactics by a target company.
 Rubicon advised the Panel that Tenon's directors had declined to provide the confirmations required by conditions (4)(b) and (4)(c) of the offer within the stipulated time period and that Tenon had publicly stated that it did not intend to provide information to an independent expert appointed by Rubicon Forests in respect of conditions Rubicon Forests had attached to the offer. Rubicon alleged that the position taken by the Tenon directors could frustrate the offer and/or deny shareholders an opportunity to decide on the merits of the offer.
 On 13 May 2004 the Panel, prior to any consideration of the complaint, asked Rubicon whether it wanted to make a formal request to the Panel to convene a meeting under section 32 of the Act in order to determine the issue raised.
 Later that day Rubicon formally requested that a section 32 meeting be convened. On 14 May 2004, the Panel met to consider Rubicon's complaint along with its formal request to convene a section 32 meeting. The Panel decided to convene a meeting under section 32 of the Act in response to Rubicon's formal request.
 At its meeting on 14 May 2004 the Panel passed the following resolution:
On or about 8 May 2004 Rubicon sent its partial takeover offer dated 5 May 2004 to Tenon and the Panel. The offer contains a number of conditions including:
(4)(b) the directors of the Company confirming to Rubicon Forests in writing (by no later than 7 days from the date of this Offer) that no shares, notes, options or other securities or interests held or controlled by any member of the Group in any company or other entity (…) are or will be subject to forfeiture, transfer or any right of pre-emption (where such forfeiture, transfer or right of pre-emption will or could have a material adverse impact on the financial position or prospects of the Group) in the event that [the partial offer succeeds], or if they fail to so confirm, an expert (being a suitably qualified person appointed by, but not an associate of, Rubicon Forests) confirming this:
(4)(c) the directors of the Company confirming to Rubicon Forests in writing (by no later than 7 days from the date of this Offer) that the interest of the Group in any company or other entity (…) in any concession, lease, grant, permit, consent, quota, authority, contract, licence, franchise, title, timber cutting, farming, mining or growing right or any other right or benefit whatsoever enjoyed by any member of the Group will not be materially and prejudicially affected in the event that [the partial offer succeeds] or, if they fail to so confirm, an expert (being a suitably qualified person appointed by, but not an associate of, Rubicon Forests) so confirming this;
The Panel has been advised by Rubicon that Tenon's directors have declined to provide the confirmations required by conditions (4)(b) and (4)(c) of the offer within the stipulated time period and that Tenon has publicly stated that it does not intend to provide information to an “expert” appointed by Rubicon in respect of conditions Rubicon has attached to its offer.
Rubicon alleges that this behaviour on the part of Tenon constitutes “defensive tactics” for the purposes of rule 38 of the Code in that it could frustrate the offer and/or deny Tenon's shareholders the opportunity to decide on the merits of the offer.
On 14 May 2004 Rubicon formally requested the Panel to hold a meeting under section 32 of the Takeovers Act 1993 to determine the matter. The Panel is accordingly convening a meeting for this purpose in response to the request.
 On 14 May 2004, the Panel gave notice of its intention to hold a meeting under section 32 of the Act on Wednesday, 19 May 2004 in Auckland. Rubicon and Tenon were requested to provide written submissions to the Panel by 5.00 p.m. Monday, 17 May 2004. These submissions were exchanged between the parties.
 On 18 May 2004, Tenon issued its target company statement in response to Rubicon's offer.
 On 19 May 2004, Rubicon announced that the offer price had been increased from $1.85 to $1.95.
 The Panel received oral submissions from both Rubicon and Tenon at the meeting.
 The matter for determination by the Panel was whether, by declining to provide the confirmations required by conditions (4)(b) and (4)(c) of the offer within the stipulated time period, and stating publicly that they did not intend to provide information to an independent expert appointed by Rubicon Forests in respect of conditions Rubicon Forests had attached to its offer, the directors of Tenon had contravened rule 38 of the Code.
 Rule 38 of the Code requires that:
(1) If a code company has received a takeover notice or has reason to believe that a bona fide offer is imminent, the directors of the company must not take or permit any action, in relation to the affairs of the code company, that could effectively result in -
(a) an offer being frustrated; or
(b) the holders of equity securities of the code company being denied an opportunity to decide on the merits of an offer.
(2) Subclause (1) does not prevent the directors of a code company taking steps to encourage competing bona fide offers from other persons.
(3) Subclause (1) is subject to rule 39
 Rule 39 of the Code requires that:
The directors of a code company may take or permit the kind of action referred to in rule 38(1) if:
(a) the action has been approved by an ordinary resolution of the code company; or
(b) the action is taken or permitted under a contractual obligation entered into by the code company, or in the implementation of proposals approved by the directors of the code company, and the obligations were entered into, or the proposals were approved, before the code company received the takeover notice or became aware that the offer was imminent; or
(c) if paragraphs (a) and (b) do not apply, the action is taken or permitted for reasons unrelated to the offer with the prior approval of the Panel.
 Clause 18(5) of Schedule 2 of the Code requires a target company statement to include:
Any other information about the assets, liabilities, profitability, and financial affairs of the target company that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.
 Clause 24 of Schedule 2 of the Code requires a target company statement to include:
Any other information not required to be disclosed by this schedule that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer.
 Points made on behalf of Rubicon included:
(a) The position adopted by the independent directors of Tenon frustrates the offer and means that it is impossible for the offer to be declared unconditional unless Rubicon waives the conditions. Non-disclosure of change in control provisions and/or pre-emptive rights provisions is a value issue that is relevant to any bidder and to shareholders trying to assess the merits of the offer.
(b) In the absence of material commercial prejudice to the target company, the independent directors should take any reasonable steps which an offeror (endeavouring to address legitimate commercial concerns) may require in the conditionality of its offer, in order to permit shareholders to decide on its merits.
(c) Rubicon does not have access to information which could allow it to independently assess the value and contractual risk implications arising from its offer following any “change in control”. Rubicon operates on the basis of publicly available information like any other shareholder in Tenon. Conditions 4(b) and (c) of the offer are designed to deal with this problem.
(d) The issue does not go to matters of significant commercial sensitivity. Rubicon merely wants to confirm that termination rights do not arise in significant contracts. It does not wish to review sensitive commercial aspects of relevant contracts.
(e) Rubicon was prepared to address any confidentiality concerns Tenon might have in respect of the independent expert process but Tenon did not respond to these proposals.
(f) Tenon has signalled in its submissions that its view regarding provision of the information may change depending on the circumstances, and may change in response to a different bidder. This does not support Tenon's position that the refusal to provide directors' confirmation or provide information to an expert is due to commercial concerns. It signals that the information has not yet been provided but may be provided if the consideration for the bid increases. There is no second bidder involved and the offer price has increased from $1.85 to $1.95.
(g) The issue of change in control provisions is acute in the context of Tenon, which is involved in a significant forest sale transaction, has significant wood supply agreements and obligations, and significant joint ventures. Any bidder would want to understand these obligations in relation to change in control events.
(h) Rule 38 extends to failures to take action. Otherwise a range of acts of omission would be permissible.
(i) Change in control in relation to key contracts is part of the “affairs of the company” for the purposes of rule 38.
 Additional points made on behalf of Rubicon included:
(a) The target company statement might have a role in addressing Rubicon's concerns. The target company statement contains two references to change in control provisions. If these are the only change in control provisions then it may address conditions 4(b) and (c) of the offer by inference. However Rubicon wants this risk specifically addressed. Any disclosure test under clause 24 of Schedule 2 of the Code has an offeree perspective. The target company statement is for offerees, not Rubicon as the offeror. The situation may be different if Rubicon had legal rights arising from reliance on the target company statement.
(b) Tenon is endeavouring to taint shareholders' perception of the bid through the “uncertainty” comments and Tenon's position on the independent expert request, as publicly stated in Tenon's news release.
 Points made on behalf of the directors of Tenon included:
(a) Rule 38 is concerned only with either positive or permissive acts relating to the activities of the target company. It does not impose a restriction that directors must not “omit or fail” to take or permit any action.
(b) Rule 38 cannot be read as imposing a positive obligation on the board of a target to take steps to actively support or facilitate an offer.
(c) Rule 38 recognises that directors can be restricted from positively disrupting or impeding an offer, but cannot be forced to positively promote it.
(d) Rule 38 does not provide that directors must not take or permit any action “in relation to the offer”. The prohibited action is described by reference to the “affairs of the code company”. The types of activities that are commonly referred to in relation to rule 38 concern actions taken by the target company. The conditions in question relate to the commercial concerns of Rubicon under the offer, not the affairs of Tenon. The “affairs of the company” is directed to the normal and ongoing activities of the company. It is designed to preserve the status quo while the bid is under consideration.
 Further points made on behalf of Tenon included:
(a) Rule 38 needs to be considered in the context of the target company disclosure requirements under rule 46 and Schedule 2 of the Code.
(b) The Code already sets out the information required from a target company to enable an offer to be reasonably considered. Rule 38 should not be used to force the directors of a target company to provide additional information or comfort to an offeror.
(c) Rubicon's argument would require Tenon directors to assume a duty in favour of Rubicon as to the accuracy of any information that it provides in respect of the relevant conditions. The Code does not require directors to assume this risk.
(d) The refusal of Tenon directors to satisfy the conditions does not frustrate the offer or deny shareholders the opportunity to decide on the merits of the offer. The offer might fail because other conditions are not satisfied, and it remains open to Rubicon to waive the conditions.
(e) The decision of Tenon's directors can be characterised as encouraging competing bona fide offers in terms of rule 38(2). The approach is consistent with encouraging competition for the control of Tenon and accords with the objective in section 20(1)(b) of the Takeovers Act.
(f) Tenon is obliged under the Code to provide a target company statement that contains the disclosure required by the Code. Clause 24 of Schedule 2 of the Code requires disclosure of any other information that could reasonably be expected to be material to the offerees' decision on the offer. Tenon also has continuous disclosure obligations. Rubicon is seeking the creation of additional obligations.
(g) There should not be a reasonableness test imposed as to whether directors ought to provide confirmations to an offeror, or confirmations/information to an expert.
 The parties' positions raise competing interpretations of rule 38. The Panel interprets the component parts of that rule as follows:
(a) The directors of the company must not take or permit any action
The Panel rejects the argument for Tenon that this catches only positive steps taken by the directors. An “action” can arise in this context, from a decision to not act; a decision to refuse to do something is itself an “action”. For instance, the Panel's earlier decision in respect of Otago Power Limited Determination: Otago Power Limited (31 May 2002) focused on a directors' decision not to register share transfers, which in the circumstances was held to constitute defensive tactics under rule 38.
(b) “In relation to the affairs of the code company”
The Panel accepts Tenon's argument that this phrase contemplates interference with the ongoing undertaking of the company's business. Typically, this would arise for example where a decision was taken to sell assets, issue further shares, declare an extraordinary dividend, or other such initiatives that alter the nature and extent of the business the offeror has taken into account in making the offer. In the view of the Panel, the scope of this phrase does not extend to a refusal to respond to a requirement that an offeror purports to make under the terms of its offer. Such conditions may well contemplate the provision of information in respect of the company, and may in that sense relate to the “affairs of the code company”. However, the requirement to provide the information arises from the offer and not from the ongoing activities of the code company. It is therefore not “in relation to the affairs of the code company” in the sense that that phrase is used in rule 38.
 As a matter of policy, the Panel's interpretation is consistent with the prohibition under rule 38 of any actions taken by the board of a target company in relation to its affairs to frustrate an offer. The restriction on defensive tactics however, cannot be seen as the basis for imputing to directors of target companies any positive obligation to provide information required by an offeror. The board of a target company should not be manoeuvred by the wording of conditions included by an offeror in its offer, into a position where it can be suggested that it is in breach of the rule 38 prohibition on defensive tactics, merely by reason of its refusal to provide information or afford access to information.
 To contemplate the very expansive interpretation of “affairs of the company” urged for Rubicon in this case would introduce the prospect of endless disputes as to the reasonableness of demands for undisclosed information by offerors, and the grounds for resisting by target company boards. In supporting its claim to an obligation for disclosure in the present case, Rubicon submitted that the relevant criteria “…does not go to the pricing of the bid, but instead is determined by the degree of difficulty or commercial prejudice occasioned on the target in facilitating satisfaction of the relevant condition”. That approach gives rise to the undesirable and inappropriate prospect of the Panel constantly refereeing such contests between offerors and target company boards. This is not contemplated by rule 38. The Panel does not see the proper application of rule 38 as being influenced by how relatively important any requested information might be to an offeror, or by how relatively innocuous it would be for the target company to comply. The rule simply does not create an obligation to provide such information.
 An evaluation of the obligation to provide information cannot focus on rule 38 alone. It has to be seen in the context of other disclosure obligations, such as those arising out of general law (continuous disclosure under securities law, the NZX Listing Rules), arising out of fiduciary duties of directors, and also arising under the Code (see clauses 18(5) and 24 of the Second Schedule to the Code at paragraphs 17 and 18). Clause 24 requiring disclosure of “any other information … material to the making of a decision by the offerees to accept or reject the offer” is particularly important. The Panel does not accept that rule 38 imposes an obligation to provide specific information going beyond the target board's other obligations to disclose, merely because the offeror has crafted a condition to its offer in terms suggesting an expectation that relevant information needs to be provided, and can readily be arranged without harm to the target company's business.
 The parties both made reference to decisions on the Australian takeovers law. The regulatory context there is materially different, with a significantly broader jurisdiction to police “unacceptable circumstances” that could constitute defensive tactics: see section 657A of the Corporations Act 2001. Even in that context, the Australian Takeovers Panel's guidelines acknowledge that:
12.34 In general it will not be unacceptable for a target to decline to co-operate with the bidder, for example, by failing to:
(a) facilitate due diligence; or
(b) satisfy a condition that it enter into a material transaction which is not part of its ordinary course of its business or contemplates by its business plan.
That is not to suggest that it is inappropriate for a bidder to announce a bid subject to such conditions.
This approach is consistent with the view the Panel adopts towards rule 38.
 Rubicon's arguments in support of its claim to information about any contractual provisions that may be triggered on a change of control included concerns that the offeror cannot rely on the target company's statement which is prepared for the offeree shareholders. The Panel expresses no view on the fine legal points as to the extent and nature of the reliance that an offeror may be entitled to place on the content of a target company statement. No limitations on any such reliance, however, could ever justify a broader interpretation of the scope of possible defensive tactics under rule 38.
 For its part, argument on behalf of Tenon extended to the notion that information sought by an offeror was able to be “bartered” in the course of the target company's pursuit of the best possible offer or offers for shares in the company. To the extent that this notion implies any concept of a fluctuating or diminished content in the disclosures required in the target company statement, such notion is firmly rejected by the Panel. In discharging their duties under clauses 18(5) and 24 of the Second Schedule to the Code, the judgement of the directors of a target company as to what is material cannot be influenced by any such consideration. It would be improper, and in breach of that duty, for target company directors to elect to withhold some information that is material to a consideration of the offer on the ground that the directors perceived some advantage in negotiating with the offeror for better terms to be included in the offer, in return for a greater level of disclosure.
 The Panel determines that it is satisfied that the directors of Tenon Limited have not contravened rule 38 of the Code in relation to their refusal to provide the confirmations required by conditions 4(b) and 4(c) of the offer within the stipulated time period, and stating publicly that they do not intend to provide information to an independent expert in respect of the same conditions.
 The Panel will deal with costs separately in terms of the Takeovers (Fees) Regulations 2001.
DATED at Auckland this 21st day of May 2004
SIGNED for and on behalf of the Panel
by the Chairman
J C King