BEFORE THE TAKEOVERS PANEL

IN THE MATTER OF

 

the Takeovers Act 1993 and
the Takeovers Code

AND

 

IN THE MATTER OF a meeting held under section 32 of the Takeovers Act 1993 to determine whether Dominion Retail Property Fund Limited has acted, or is acting, or intends not to act in compliance with the Takeovers Code by failing to adequately specify the consideration payable under its takeover offer, dated 1 December 2003, for all of the parcels of shares and bonds issued by Tri-City Properties Limited and by sending a letter to security holders of Tri-City Properties Limited, dated 5 December 2003, stating that the "additional cash amount" per bond for acceptances received on or prior to 31 December 2003 would be $118.75 rather than $475.

MEETING:

 

17 December 2003 at Wellington

MEMBERS:

 

J C King (Chairman)
A Lawrence 
K J O'Connor 
D J Quigg

APPEARANCES:

 

D Cooper and J Radcliffe, representing Dominion Retail Property Fund Limited;
J Blake, representing Tri-City Properties Limited; 
R Taylor, representing Farmers Mutual Investment Services Limited; 
P D McKenzie QC as counsel assisting the Panel

IN ATTENDANCE:

 

P Duffy and I Hasell, representing Dominion Retail Property Fund Limited; 
V Laughton, representing Tri-City Properties Limited; 
G Smith representing Farmers Mutual Investment Services Limited; 
K G Morrell, M M Hemphill and D Tsai (from Panel Executive)

DETERMINATION:

 

19 December 2003

Background

[1]  Tri-City Properties Limited ("Tri-City") is a New Zealand incorporated company. It has assets of more than $20 million and 385 security holders. As such, Tri-City is a code company for the purposes of the Takeovers Act 1993 ("the Act") and the Takeovers Code ("the Code").

[2] During 1999 Tri-City issued 2300 parcels of securities each consisting of 1000 shares and one mortgage bond. The shares and bonds are "stapled" securities and cannot be traded separately.

[3] On 18 November 2003 Dominion Retail Property Fund Limited ("Dominion"), a New Zealand incorporated company, gave notice under rule 41 of the Code of its intention to make a full offer (under the Code) for all the parcels of shares and mortgage bonds in Tri-City ("the offer").

[4] Prior to giving notice under rule 41 Dominion had entered into an agreement, dated 13 November 2003, with Farmers Mutual Investment Services Limited ("Farmers Mutual") under which Farmers Mutual agreed to accept the takeover offer to be made by Dominion in respect of all of the Tri-City shares and bonds held by Farmers Mutual. At that date Farmers Mutual held 57.56% of the parcels of shares and bonds issued by Tri-City.

[5] On 2 December 2003 Dominion sent its offer document, dated 1 December, to the security holders of Tri-City, to Tri-City and to the Takeovers Panel ("the Panel"). The offer is scheduled to close on 31 December 2003.

[6] Both the takeover notice and the offer state that the consideration offered for each parcel of shares and bonds is:

  • in respect of each Share, $0.75 in cash;
  • in respect of each Bond:
    • $4,000 in cash; plus
    • an additional cash amount equal to the amount of interest accrued but unpaid in respect of the bond on the later of 31 December 2003 or the date on which the acceptance is received. For acceptances received at any time on or prior to 31 December 2003, this additional cash amount will be $475 per bond.

[7] On 4 December 2003 Dominion's legal advisers informed the Panel that Dominion had discovered, following a query from a security holder, that the "additional cash amount" of $475 per bond referred to in the last bullet point of the statement of consideration (the "last bullet point") had been calculated on the basis of the interest payable on the bonds for a full year. In fact interest on the bonds is paid quarterly, the last payment having been made for the quarter ended 30 September 2003. The Panel was told that Dominion had intended to include a figure which reflected the amount of interest payable for the quarter ending 31 December 2003.

[8] Dominion advised the Panel that it proposed to send a letter to Tri-City security holders explaining that the specified "additional cash amount" was incorrect and that the actual additional cash amount payable in respect of each of the bonds for acceptances received on or prior to 31 December would be $119.73. Dominion's legal advisers forwarded to the Panel the letter it proposed to send to Tri-City security holders. Dominion sought the Panel's approval of the proposed letter.

Initial actions by the Panel

[9] On 5 December 2003 the Panel met to consider the draft letter to Tri-City security holders and a written submission from Dominion's advisers. The Panel decided that:

  • It had real concerns that the proposed letter, or a letter of similar effect, may constitute a non-permitted variation of Dominion's offer;
  • Whether Dominion decided to send the letter, or a letter of similar effect, to Tri-City security holders was a matter for Dominion to decide;
  • The Panel did not intend to restrain Dominion from sending the proposed letter, or a letter of similar effect, to Tri-City security holders;
  • The Panel reserved the right to take further action in respect of this matter in the future, particularly if a complaint was received from a Tri-City security holder.

[10] On 5 December 2003 Dominion sent a letter to Tri-City security holders (the "correction letter"). The letter advised security holders that:

"The amount of interest that will be accrued but unpaid on each bond as at 31 December 2003 will be $118.75. This is the amount of the final quarterly interest payment due in respect of each bond and represents the balance of the $475 annual interest. Therefore, for acceptances received at any time on or prior to 31 December 2003 the additional cash amount…will be $118.75 and not $475."

[11] On 8 December 2003 the Panel received a copy of a letter from Tri-City's legal advisers to Dominion in respect of Dominion's offer and the correction letter. The letter indicated that Tri-City was concerned that:

(a)  The correction letter could be interpreted as a variation of Dominion's offer not permitted by the Code; and

(b)  Tri-City security holders may have been misled by the last bullet point in the statement of consideration and been induced to accept the offer in reliance on the promise of an "additional cash amount" of $475.

[12] At its meeting on 9 December 2003, the Panel passed the following resolution: 

"On 24 November 2003 Dominion gave notice of its intention to make a takeover offer for all of the parcels of shares and bonds issued by Tri-City that it did not already hold. Dominion made a takeover offer for all of the parcels of shares and bonds issued by Tri-City on 2 December 2003. 

The notice of intention to make a takeover offer and the subsequent offer stated that the consideration for each parcel of shares and bonds was:

  • in respect of each Share, $0.75 in cash;
  • in respect of each Bond:
    • $4,000 in cash; plus
    • an additional cash amount equal to the amount of interest accrued but unpaid in respect of the bond on the later of 31 December 2003 or the date on which the acceptance is received. For acceptances received at any time on or prior to 31 December 2003, this additional cash amount will be $475 per bond.

The offer is scheduled to close on 31 December 2003. Subsequent to sending the offer to Tri-City security holders Dominion advised the Panel that it had discovered that the $475 "additional cash amount" referred to in the statement of the consideration ("the additional cash amount") was calculated on the basis of the interest payable on the bonds for a full year. Dominion told the Panel that it had intended to include a figure which reflected the amount of interest payable quarterly"

On 5 December 2003 Dominion sent a letter to Tri-City security holders stating that the additional cash amount was incorrect. The letter stated that: 

"The amount of interest that will be accrued but unpaid on each bond as at 31 December 2003 will be $118.75. This is the amount of the final quarterly interest payment due in respect of each bond and represents the balance of the $475 annual interest. Therefore, for acceptances received at any time on or prior to 31 December 2003 the additional cash amount…will be $118.75 and not $475." 

The Panel has decided to convene a meeting under section 32 of the Takeovers Act 1993. The Panel considers that Dominion may not have acted or may not be acting or may intend not to act in compliance with the Code, by failing to adequately specify the consideration payable under the takeover offer and by sending the letter to Tri-City security holders, dated 5 December 2003, stating that the additional cash amount for acceptances received on or prior to 31 December 2003 would be $118.75 rather than $475.

[13] On 10 December 2003 the Panel gave notice of its intention to hold a meeting under section 32 of the Act on Wednesday 17 December 2003 in Wellington. Dominion, Tri-City and Farmers Mutual were requested to provide written submissions to the Panel by 9 a.m. Monday 15 December 2003.

[14] The Panel issued summonses under section 31N of the Act to Mr Paul Duffy, Director and Chief Executive Officer of Dominion, Ms Virginia Laughton, a director of Tri-City and employee of Investment Services Limited, manager of Tri-City and Mr Gordon Smith, Chief Executive Officer of Farmers Mutual requiring them to attend the Panel's hearing.

[15] Dominion and Tri-City provided their written submissions as requested. Submissions were exchanged between Dominion and Tri-City and provided to Farmers Mutual prior to the hearing. Parties were asked to provide any further submissions in response by 4.00 p.m. Tuesday 16 December 2003. Further submissions were received from Dominion and Tri-City.

[16] At the Panel's meeting on 17 December 2003 evidence was taken under oath from Mr Duffy, Ms Laughton and Mr Smith. Evidence was also taken under oath from Mr Ian Hasell, Prospectus Manager of Dominion.

[17] The matter for determination by the Panel was whether Dominion, by the manner of its specification of the consideration payable under the offer and by sending a letter to security holders of Tri-City stating that the "additional cash amount" per bond for acceptances received on or prior to 31 December 2003 would be $118.75 rather than $475, had acted, or was acting, or intended not to act in compliance with the Code.

Parties' submissions

Dominion's submissions

[18] Dominion submitted that although there was a mistake in the last bullet point its intention was clear.

[19] Dominion asserted that the relevant background to interpreting the meaning of the last bullet point includes the following: 

(a)  The first words of the statement of consideration state that the "additional cash amount" will be equal to the amount of accrued but unpaid interest;

(b)  security holders received the same amount by way of interest each quarter and therefore would have been aware that the amount of interest accrued but unpaid at 31 December 2003 would not be $475 but rather $118.75 per bond (although Dominion later acknowledged that the amount received by security holders may be an after-tax amount);

(c)  The covering letter accompanying the takeover offer explained the consideration by reference to the accrued interest but did not refer to the figure of $475.

[20]  Dominion also asserted that it is a well established rule of interpretation that if there is any inconsistency between words and figures in a contract or document, the words will prevail.

[21] Accordingly Dominion submitted that the intention of the parties and the common sense interpretation of the offer is that the consideration payable under the last bullet point was to be an amount equal to the amount of accrued unpaid interest per bond as at 31 December 2003. It was clear that such interest would not amount to $475 and accordingly that the figure of $475 per bond stated in the offer was a mistake that was or should have been apparent to Tri-City security holders.

[22] Dominion also asserted that its interpretation of the last bullet point was supported by the fact that if the offer were extended, any security holder accepting the offer after 31 December 2003 would not be entitled under the additional bullet point to receive an "additional cash amount" of $475. The amount of the "additional cash amount" in those circumstances would be the actual amount of accrued interest as at the date of acceptance. This would be the amount accrued from 1 October 2003 which would be the amount of $118.75 plus interest accrued after 31 December 2003. Dominion submitted that on this basis to interpret the statement of consideration other than as suggested by it could produce absurd and anomalous results.

[23] Dominion submitted that consequently the correction letter had no status under the Code and in particular was not a variation of the terms of the offer. In its view the correction letter was merely to clarify any confusion arising from the incorrect reference to $475 in the last bullet point.

[24] Dominion also stated that the correction letter clarified the meaning of the last bullet point promptly and that no security holder would have been prejudiced except for a few holders who had accepted the offer before receiving the letter.

[25] Dominion acknowledged that the security holders that had accepted the offer before receiving the correction letter may have been prejudiced if they believed that the "additional cash amount" was $475. Dominion stated that it would be prepared to give an undertaking to the Panel that it would:

(a)  Write to all security holders stating that security holders who had accepted the offer could revoke their acceptances; and

(b)  Extend the term of the offer to 30 January 2003.

Tri-City's submissions

[26] Tri-City submitted that the second sentence of the last bullet point is an express statement of fact and clearly states that the "additional cash amount" payable in respect of acceptances received before or on 31 December is $475 per bond.

[27] Tri-City submitted that a number of Tri-City security holders would not have, nor should have, appreciated that the reference to $475 in the last bullet point was a mistake for the following reasons:

(a)  Unless a security holder had an intimate knowledge of the amount of interest accrued but unpaid in respect of each bond, they would reasonably rely upon the second sentence of the last bullet point;

(b)  While the first sentence of the last bullet point describes the manner in which the "additional cash amount" would be calculated, the second sentence specifies the actual sum payable and at least a number of security holders would rely upon the relatively straight-forward language and express sum contained in the second sentence, rather than attempting to interpret the more difficult language of the first sentence;

(c)  The use of the word "additional" in the last bullet point suggests that the "additional cash amount" is an additional entitlement available only to security holders accepting the offer before 31 December. Even if a security holder calculated that the unpaid accrued interest was $118.75, they might still reasonably consider that they would be receiving $475 as an additional amount or added incentive. A security holder might consider that the "additional cash amount" is not the passing on of the interest on the bond to be paid by Tri-City (to Dominion) but part of the consideration offered by Dominion to Tri-City's shareholders to induce early acceptance of the offer;

(d)  To the extent that there is any ambiguity between the first and second sentence of the last bullet point, the second sentence should be interpreted as taking priority, since it sets out an express sum and categorically confirms that $475 is the sum determined by reference to the first sentence.

[28] Tri-City stated that it had received more than 30 telephone enquiries from Tri-City security holders concerning the Dominion offer, although few of these queries related to the amount of consideration.

[29] Tri-City submitted that an appropriate response from the Panel would be to either:

(a)  Issue a restraining order with respect to the correction letter, so that the original terms of the offer stand without variation so that all Tri-City security holders are in fact offered an "additional cash amount" of $475 per bond; or

(b)  Require that the Dominion offer is withdrawn and recommenced.

Farmers Mutual's submissions

[30]  Farmers Mutual stated at the meeting that although the last bullet point referred to an "additional cash amount" of $475, when it accepted Dominion's offer it did so on the understanding that the "additional cash amount" would be an amount equal to the amount of accrued interest up to 31 December 2003 i.e. $118.75 per bond.

[31] Farmers Mutual stated that when it negotiated the terms of the agreement to accept a takeover offer from Dominion its intention was to ensure that an amount equal to the amount of accrued and unpaid interest on 31 December 2003 would be passed to itself and any other Tri-City security holders accepting the offer. It had not anticipated that any amount greater that the amount of accrued interest payable would be offered or paid by Dominion.

[32] Farmers Mutual had given a written commitment to Dominion that if Tri-City security holders were given the opportunity to revoke their acceptances of Dominion's offer, Farmers Mutual would not revoke its acceptance.

[33] Farmers Mutual stated that if Dominion's offer was withdrawn and recommenced and the "additional cash amount" per bond was the amount of accrued interest on the bond at the date of acceptance of the offer, it would accept the new offer.

Panel analysis

[34] The first issue for the Panel to determine was whether the statement of consideration contained in Dominion's offer complied with the requirements of the Code.

[35] Rule 41 of the Code requires that a takeover notice must contain or be accompanied by the information specified in Schedule 1 (except clauses 1 and 4) stated as at the date of the notice. Rule 44(d)(i) requires that an offer must contain or be accompanied by the information specified in Schedule 1.

[36] Clause 5 of Schedule 1 to the Code requires that a takeover notice or offer document must contain "all the terms and conditions of the offer". The consideration is a fundamental term of any contract. The Code contains a number of rules concerning consideration.

[37] The Panel considers that an offer document must state the consideration offered in terms such that offerees can understand the amount that will be paid to them should they decide to accept the offer (and the offer is declared unconditional).

[38] The statement of consideration must be true and correct and not misleading. This is indicated by the certificate which is required to be included in the offer document by clause 19 of Schedule 1 to the Code. Whilst the certificate itself is limited to the knowledge and belief of the individuals signing the certificate, nevertheless it is a clear indication that the Code requires all information contained in the offer document to be true and correct and not misleading.

[39] The last bullet point of the statement of the consideration payable in respect of each bond contains two statements relating to the payment of an "additional cash amount" as follows:

(a)  "an additional cash amount equal to the amount of interest accrued but unpaid in respect of the bond on the later of 31 December 2003 or the date on which the acceptance is received"; and

(b)  "For acceptances received at any time on or prior to 31 December 2003, this additional cash amount will be $475 per bond".

[40]  The meaning of each sentence when considered separately may be discernible, however the sentences must be read together. The words "this additional cash amount" in the second sentence link the two statements. As the two sentences are inconsistent, the last bullet point is ambiguous. Dominion's intention is contained in the first sentence but the reference to $475 in the second sentence is a mistake, which is misleading and causes confusion.

[41] Dominion asserted that Tri-City security holders should have known that under the terms of the bonds the amount of accrued interest payable would not be $475. As the first sentence of the last bullet point stated that the "additional cash amount" would be an amount equal to the amount of accrued interest as at 31 December 2003 and security holders knew, or ought to have known, that under the terms of the bonds they would not have been entitled to a payment of $475 per bond, security holders should have realised that the reference to $475 was a mistake.

[42] However, the Panel considers that Tri-City security holders should not be expected to make such an analysis in order to determine the consideration payable under the offer.

[43] It is illustrative that neither those in Dominion responsible for preparing the document, their legal advisers or Farmers Mutual when they saw a draft of the offer document, realised the figure was a mistake.

[44] The Panel considers that the inconsistencies in the last bullet point of the statement of consideration created a level of uncertainty such that security holders may not have understood the amount of consideration payable to them should they accept the offer on or prior to 31 December 2003. Accordingly, the Panel considers that Dominion's offer document did not correctly state all of the terms and conditions of the offer as required by clause 5 of Schedule 1 to the Code.

[45] The next question for the Panel to determine was whether the correction letter was a variation of the offer not permitted by the Code.

[46] The Panel considers that if an offer contains a clear statement of the terms of the offer, even if the statement contains a mistake, the offeror is not entitled under the Code to unilaterally amend the offer to correct that mistake unless such an amendment would be permitted as a variation to the offer by rule 27 of the Code. If the mistake was such that the consideration stated was higher than the amount the offeror intended to pay, the offeror would not be entitled to vary the offer by reducing the amount of consideration payable as rule 27 only permits the consideration under an offer to be increased, not decreased.

[47] However, in the current circumstances Dominion was not varying the offer but simply clarifying the consideration offered seeing that the offer did not contain a clear statement of the consideration. Although the offer contained a statement that the "additional cash amount" for acceptances received on or prior to 31 December would be $475, this statement, for the reasons outlined above, cannot be viewed in isolation from the first sentence of the last bullet point.

[48] The correction letter was an attempt to correct a defect in the offer document, namely the absence of a clear statement of the consideration payable. It has no status under the Code. It does not constitute a variation of the offer and does not amend the defect in the offer.

Determination

[49] The Panel determines that the incorrect reference to an "additional cash amount" of $475 resulted in the statement of the consideration being confusing and misleading. Accordingly, the Panel determines that it is not satisfied that Dominion has acted, or is acting, or intends to act in compliance with the Takeovers Code in that Dominion failed to adequately specify in its offer document the consideration payable under its takeover offer. However, the Panel considers that the correction letter did not constitute a variation of the offer and was therefore not in breach of the Code.

Remedies

[50]  Although it was a mistake that resulted in the offer document not containing a clear statement of the terms and conditions of the offer as required by clause 5 of schedule 1, the sending of a correcting letter is not sufficient to remedy the non-compliance with the Code.

[51] Although the correction letter may have clarified the consideration Dominion intended to offer, some security holders accepted the offer before receiving that letter.

[52] In all the circumstances, the Panel does not consider that it would be in the interests of Dominion or Tri-City security holders for the offer to be withdrawn and a new offer made with the mistake rectified.

[53] The Panel considers that the best approach is for the offer to be clarified and for all security holders who have accepted the offer to be given the right to withdraw their acceptances. For this to occur in an orderly fashion, and also taking into account the impact of the holiday period, it will be necessary for the offer to be extended beyond the present expiry date of 31 December 2003.

[54] Accordingly, the Panel will accept an undertaking, under section 31T of the Act, from Dominion that it will: 

(a)  Extend the period of its offer to 30 January 2004;

(b)  Give all security holders of Tri-City who accepted Dominion's offer prior to receipt of notification of the Panel's determination the right to revoke that acceptance at any time up to the closure of Dominion's offer;

(c)  Send immediately to all security holders of Tri-City a letter to be approved by the Panel explaining the correct terms of the offer, the rights of security holders to revoke their acceptance, and related matters.

[55] As security holders will have the ability to revoke their acceptances up until the end of the extended offer period, security holders who revoke their acceptances after 7 January 2004 (being the date for payment of the consideration in respect of acceptances received on or before 31 December 2003) may have received payment in respect of their earlier acceptance of the offer before they revoke their acceptance. Consequently, the right of revocation will be subject to a condition that revocation by a security holder who has received payment under the offer will not be valid unless and until that payment is returned to Dominion.

[56] Dominion has provided the Panel with an undertaking in the terms outlined above and has undertaken to forward the letter to Tri-City security holders on 19 December 2003.

Costs

[57] The Panel will deal with costs separately in terms of the Takeovers (Fees) Regulations 2001.

DATED at Auckland this 19th day of December 2003

SIGNED for and on behalf of the Panel by the Chairman

_______________

J C King