ANNUAL REPORT 2006
Chairman's Review
John King
The year 2006 marks the fifth anniversary of the operation of the Takeovers Code. Over its first five years
the Code has proved its effectiveness and resilience.
The Code contributes to confidence in New Zealand’s capital markets by providing investors with certainty
as to how changes of control of code companies can occur. The Code provides a special regime for changes of
control of code companies based on a process of a takeover offer for control. Parties can compete for control
of a company on the basis of a clear set of rules with all shareholders being treated equally and having the
opportunity to take part in the takeover process. Investors in code companies are given special status under
New Zealand takeovers law. Unless that special status is protected the integrity of the takeovers market
is at risk.
THE COMPANIES ACT
The Companies Act 1993 provides other procedures for changes of control of companies through schemes
of arrangement approved by the High Court and amalgamations. These procedures do not have the same
protections for shareholders that apply to changes of control under the Code, although they can be and have
been used in relation to code companies.
The most significant market issue for the Panel that has arisen this year has been the increasing use of
schemes of arrangement and amalgamations under the Companies Act to effect changes of control of code
companies. Technical devices have been utilised in some cases to ensure that schemes of arrangement were
not caught by the Code. One example was the INL/Sky merger. The takeover of Waste Management by
Trans Pacific Industries Group used the amalgamation procedure to avoid the requirements of the Code.
The Panel recognises that schemes of arrangement in particular can have a role in mergers of code
companies. However, we are of the view that the principles of the Code should apply when procedures other
than a takeover offer under the Code are used to effect changes of control of code companies.
The Panel has a function to keep the law relating to takeovers of code companies under review. We drew
our concerns to the attention of the market in April 2006 with a discussion paper on exemptions relating to schemes of arrangement. We took steps to mitigate the use of schemes of arrangement as a means of
avoiding the protections for shareholders contained in the Code. We revoked the class exemption for initial
public offers which had been relied upon in some schemes of arrangement to effect the final stages of a
merger. The class exemption was originally granted to enable new public company floats to proceed where
the parties had complied with the Securities Act 1978 and made some additional disclosures to prospective
investors about control percentages. The use of this class exemption in schemes of arrangement was not
intended to assist schemes to avoid the provisions of the Code.
We also signalled that the Panel would seek to be heard by the High Court when the Court is considering
schemes of arrangement involving code companies. We considered that it would assist the Court in its
supervision of schemes of arrangement to receive submissions on the use of the scheme procedure and
the protections contained in the scheme for shareholders, particularly minority shareholders, taking into
account the special legislative treatment relating to code companies contained in the Takeovers Act and
the Code.
The Panel decided to make submissions to Government about the relationship between the Code and
the provisions of the Companies Act as they apply to amalgamations and schemes of arrangement, and to
recommend appropriate changes to the legislation. The proposals for law changes were set out in a further
discussion paper released for public comment in June 2006. The proposals for schemes would require the
Court to take into account the principles of the Code and the Panel’s recommendations in determining
its requirements for the approval of the scheme. Amalgamations would require approval by the Panel.
The Panel’s conditions of approval would be based on the principles of the Code. We believe the matter
is urgent. We are considering the submissions received in response to the June discussion paper and will
make recommendations to Government without delay.
SECURITIES LEGISLATION
The Securities Legislation Bill, expected to be enacted soon, will introduce changes that are significant for
market participants.
Code company definitions
Currently all listed companies are covered by the Code. This includes listed companies with only nonvoting securities quoted on the NZDX, some of which are wholly-owned subsidiaries of overseas companies. It was never intended that the Code should apply to these companies and the Panel has granted a number of exemptions to address the problem. Under the new definition the Code will apply to listed companies with securities that confer voting rights quoted on the exchange and to companies that have been listed and had securities that confer voting rights quoted on the exchange in the preceding 12 months. For unlisted companies, the new definition removes the asset threshold so the Code will apply to every company that has 50 or more shareholders. When the new law is enacted some companies currently within the definition of a code company will no longer be subject to the Code, and some small non-listed companies that currently are not subject to the Code will come under its jurisdiction.
Misleading conduct
The new law addresses misleading conduct relating to takeovers. In particular, the new rule 64 effectively imports section 9 of the Fair Trading Act 1986 into the Code. This will enable the Panel to take action in respect of any misleading conduct relating to takeovers. Currently the Panel can only deal with misleading conduct in takeover documents. Misleading conduct includes bid tactics such as extending an offer period after a statement that the offer period will not be extended, raising the offer price after a statement that the price will not be raised, and making a second offer after the first offer is promoted as the only offer. Last and final statements will have to be observed. The Panel is developing policies for enforcing the new rule 64 and will take into account policies in Australia where ‘truth in takeovers’ has received considerable attention.
Panel’s enforcement powers
The new legislation will also enhance the Panel’s present powers to make temporary restraining orders by
enabling it to make permanent compliance orders. These complement the new rule 64. The permanent orders will give the Panel the power to deal decisively with any kind of misleading conduct and with misleading or deceptive, or otherwise defective, takeover documents. They will enable the Panel (without recourse to the Courts) to prohibit or restrict persons from making statements or distributing documents, and to direct them to disclose information or to publish, at their own expense, corrective statements. The Panel will also be able to make restraining orders and compliance orders for breaches of exemptions as well as breaches of the Code itself, and against any person with a secondary involvement in the breach as well as the person who has actually committed the breach.
Civil remedies and penalties
The new regime provides for the High Court to make compensatory orders which may be awarded to a
person for loss or damage caused by a contravention of the Code, and includes a new pecuniary penalties regime. The fines for general offences under the Takeovers Act are increased. In addition, the Court can make management banning orders against persons convicted of misleading the Panel or of making or disseminating materially false or misleading statements or information. Company directors who persistently contravene the Takeovers Act or Code, the Companies Act, the Securities Markets Act or the Securities Act may also be subject to management banning orders.
Technical amendments to the Code
The long awaited technical amendments to the Code are soon to be promulgated by Government. The regulations are expected to be completed and to come into effect following the passing of the Securities Legislation Bill.
The strengthening of the law relating to takeovers will fill a number of gaps in the present legislation and is welcomed by the Panel. However the Panel's approach to its role under the Takeovers Act and the Code will not change. When a breach occurs we will continue to seek the most appropriate remedy for the breach in the circumstances and the right outcome for the market. We prefer to find a remedy that keeps a takeover bid on track whether or not that requires the use of formal powers. At all times the Panel aims to facilitate the effective operation of the takeovers market. We will be issuing more detailed information on the new legislation and technical amendments to the Code as soon as firm dates for their introduction are known.
TAKEOVERS MARKET
There was considerable activity in the past year in the takeovers market. However the Panel's policies and
procedures are now relatively well understood so, although the Panel remained very busy with its approval,
exemption and enforcement duties, no particular difficulties arose apart from the issue of schemes of
arrangement and amalgamations mentioned above. Two enforcement issues were of significance.
Oyster Bay
The Oyster Bay case1 arose out of the contested bid for Oyster Bay Marlborough Vineyards. This was the first time that a Panel decision had come before the Court. In all previous cases breaches of the Code had been remedied without the need for recourse to the Court. It is an important case which emphasised the care that company directors must take in fulfilling their duties under the Code.
The case arose because the target company statement omitted certain information relating to a particular valuation of the vineyards owned by Oyster Bay. The Panel had determined after a hearing under Section 32 of the Takeovers Act that the information should have been included in the target company statement, a decision which was upheld by the Court. His Honour Justice Miller said:
"...the standard of care required by the Code was not observed. Those signing the certificate [in the target company statement] were not in a position to express the view that information in the Target Company Statement was true and correct and not misleading, by omission or otherwise. Proper enquiries had not been made to identify the information that was reasonably likely to be material to shareholders, and to ensure that it remained accurate as at the date of the Statement."2
Rank Group/Carter Holt Harvey
The other enforcement issue of significance arose out of the bid by Rank Group for Carter Holt Harvey.
Two offers were made by Rank Group. The first offer at a price of $2.50 per share closed after the offer period had been extended a number of times with Rank Group controlling 85.7% of the shares in
Carter Holt Harvey. Seven days after the first offer closed Rank Group gave notice of its intention to make
a further offer. The second offer was expressed as being open for acceptance for 30 days. However the terms
of the offer provided a base consideration of $2.70 per share, with an additional payment of $0.50 per share
for all acceptors if sufficient acceptances were received to enable Rank Group to reach the 90% compulsory
acquisition threshold within seven days of the date of the offer.
There are two aspects to this case. First the Panel decided that the seven day provision for the higher
consideration in the second offer effectively reduced the offer period to seven days in breach of the Code's
minimum requirement of a 30 day period. As a result the second offer was amended to a straight offer at
$2.75 per share. This decision demonstrates the importance of taking into account the policy which the
particular rule was clearly designed to implement, when interpreting the Code.
The second aspect of importance relates to the effect of the proposed new rule 64, dealing with misleading
conduct. This new provision will have a significant effect on what can be called "follow on" offers. The
issue that will arise will be whether any conduct or statements in connection with the first offer will
constitute misleading or deceptive conduct in breach of rule 64 as a consequence of a "follow on" offer.
ANNUAL ACCOUNTS
The Panel received increased baseline funding in the Government’s 2005 budget statement which enabled
an increase in the executive during 2005/2006. The Panel reported a small operating surplus in line with
its own forecasts. However, we anticipate that costs will rise when the legislative changes in the Securities
Legislation Bill come into effect in 2007. This is expected to result in a deficit in 2006/2007. Additional
funding will be required in future to enable the Panel to undertake the additional work arising from those
changes.
CONCLUSION
I wish to acknowledge once again the high quality of the work performed by the Panel's executive. I also
acknowledge the continuing support and commitment of Panel members. I have been fortunate to have
retained the same experienced and able members for the first five years of the operation of the Code.
J.C. King
Chairman
Footnotes
- Takeovers Panel v Delegat’s Wine Estate Ltd & Anor (No 3) (HC, Wellington, CIV-2005-485-002058. 28 November 2005, Miller J).
- Takeovers Panel v Delegat’s (No 3) at para [62].
