Guidance Note: Recovery of expenses under rule 49(2) of the Code
1
Introduction
1.1
Recent takeover costs disputes have highlighted the
market's need for guidance as to the scope of expenses
falling within the category of properly incurred under
rule 49(2) of the Code. Rule 49 of the Code provides:
"(1)
Despite anything in the constitution of the target company, each director of the target company is entitled to have refunded to the director by the target company any expenses properly incurred by the director on behalf, and in the interests, of holders of equity securities of the target company in relation to an offer or a takeover notice.
(2)
The target company may recover from the offeror, as a debt due to the target company, any expenses properly incurred by the target company in relation to an offer or a takeover notice, whether as a result of refunds made under subclause (1) or otherwise."
1.2
In general terms the view of the Takeovers Panel
("Panel") is that the principles put forward by the High
Court in Canterbury Frozen Meat Company Ltd v
Waitaki Farmers' Freezing Company Ltd [1972] NZLR
806 ("Canterbury Frozen Meat") in considering the
meaning of "properly incurred" expenses can be applied
to rule 49(2). Canterbury Frozen Meat was in respect
of section 11(2) of the Companies Amendment Act 1963,
which was similarly worded to rule 49(2) of the Code.
Section 11(2) was superseded by rule 49(2).
1.3
The expenses scrutinised by the Court in that case were consistent with the corporate takeovers environment at that time and the facts of the case. Those expenses were relatively confined in nature and included a consideration of expenses incurred in relation to defensive tactics, described by the Court as actions resisting the takeover.
1.4
In the Panel's view, it is not correct to treat the expenses actually approved by the Court in Canterbury Frozen Meat as being exhaustive of what expenses might be properly incurred whether in 1972 or in the current takeovers environment. What is critical is the nature of the expense and whether it falls within the general category of expenses identified by the Court. In making such a determination, regard must be had to the legal and corporate environment in which takeovers occur. Since 1972, law and practice as it affects takeovers has undergone substantial change. The responsibilities, accountabilities and expectations to which target companies and their Boards are now subject in the face of a takeover offer, bear upon the actions they take and the expenses which they incur.
1.5
The Panel received conflicting submissions from market
participants on its draft of this guidance note. Some submissions urged that the categories of recoverable expenses should be expanded considerably, without restriction (other than reasonableness), to expenses such as success fees charged by professionals to target companies. Others urged restricting the recovery of costs to expenses related to notices and target company statement obligations alone.