INTRODUCTION

1. The Panel has reviewed the provisions of the Code that relate to partial takeovers.
2. The Panel has noted that it has had to intervene in most of the partial offers that have been made under the Code, whether directly by way of enforcement action or the granting of exemptions, or indirectly through informal measures (such as suggesting revisions to draft offer documents).
3. The Panel is concerned about any difficulties that market participants are experiencing with the provisions of the Code which relate to partial offers.

Request for comments on this paper

4. The Panel invites submissions on the preferred options in this paper.
5. The closing date for submissions is 5p.m. Friday, 9 October 2009.
6. Submissions should be sent to the Takeovers Panel:

7. Any submissions received are subject to the Official Information Act 1982. The Panel may make submissions available upon request under that Act. If any submitter wishes any information in a submission to be withheld, the submission should contain an appropriate request (together with a clear identification of the relevant information and the reasons for the request). Any such request will be considered in accordance with the Official Information Act 1982.

EXECUTIVE SUMMARY

8. A partial offer under the Code enables a person to become the holder or controller of 20% or more, but less than 100%, of the voting rights in a Code company,¹ by way of an offer to all shareholders.
9. Partial takeovers occur relatively infrequently in the New Zealand market, comprising about 10% of all offers made under the Code. Eleven partial offers have been made since the introduction of the Code in 2001. In contrast, (at the time of writing) 90 full offers have been undertaken.
10. A partial offer is subject to some rules in the Code which specifically relate to the nature of partial offers, but in all other respects is subject to the same rules as a full offer.
11. The Panel has reviewed the provisions of the Code that relate to partial offers and has identified the following issues:
    1. The potential distortion in the scaling of acceptances where shares in the target company are held by a custodian or nominee;
    2. Frequent misstatements in draft offer documentation of the "specified percentage" of shares being sought by the offeror under a partial offer;
    3. Problems with identifying the persons eligible to vote on whether to approve an offeror making a partial offer that results in the offeror having voting control in the target company of 50% or less;
    4. Potential difficulties caused by the percentage of voting rights already held or controlled by an offeror being diluted during the course of an offer;
    5. Potential difficulties for an offeror that wishes to extend the offer period of a partial offer; and
    6. The implication of votes cast by the offeror or its associates to approve an offeror making a partial offer that results in the offeror having voting control in the target company of 50% or less.
12. The Panel's objective is to ensure that partial offers are an effective and efficient mechanism for facilitating changes of control of Code companies.
13. In light of the issues identified, the Panel proposes a number of options for resolving the issues. The options are analysed against the Panel's objective. Some of the proposed preferred options are for the Panel to recommend to the Minister of Commerce amendments to certain rules in the Code.
14. Appendix A of the paper is a hypothetical example of a partial offer by an offeror who wishes to increase its voting control in a Code company to 50.1%. It compares the outcome of the application of the scaling rules between a share register of direct shareholders in the target company and a share register where at least one major shareholder is a nominee, holding on behalf of several underlying beneficial owners.
15. Appendix B is a review of the partial offers made under the Code, based on the information available in the Panel's records.

STATUS QUO

Status quo

16. The fundamental rule contained in rule 6(1) of the Code is that no person can:
    1. increase their control percentage to more than 20% (together with their associates) of the voting rights in a Code company; or
    2. increase an existing percentage of 20% or more of the voting rights in a Code company.
17. Rule 7 of the Code provides for various exceptions to the fundamental rule. One of those exceptions, under rule 7(b), is an acquisition of voting rights through a partial offer.
18. Rules 9 to 14 in Part 3 of the Code prescribe specific requirements in respect of partial offers. Parts 4 to 6 of the Code set out the various general rules in respect of both full and partial takeover offers. Part 4 provides general provisions that apply to an offer, such as the requirement that the same price is offered to all shareholders, an independent adviser's report on the merits of the offer is prepared, and rules in respect of the conditions of the offer, making variations to the offer, and payment of the consideration. Part 5 relates to dealings and defensive tactics by the target company during the course of the offer. Part 6 relates to the offer procedure.
19. A partial offer is an offer for a "specified percentage" of the voting securities in the target company, which are not already held or controlled by the offeror (rule 9).²

Figure 1: Specified percentage example

20. An offeree may accept a partial offer in respect of any number of their shares.
21. If the offer is successful, the offeror must take up (and, consequently, the offeree will sell) the lesser of either:
    1. The number of the offeree's securities that equates to the specified percentage; or
    2. The number of securities that the offeree accepts into the offer.³
22. To the extent that the offeror does not receive, under the above formula, sufficient acceptances to acquire the specified percentage of voting securities sought under the offer, the offeror must acquire the further securities that it requires to reach its desired amount from offerees with "excess" acceptances. Offerees with excess acceptances are those offerees who have accepted the offer in respect of more of their securities than the specified percentage. The offeror takes up the required number of securities from the 'pool' of excess acceptances on a pro rata basis from the relevant offerees.⁴

Figure 2: Example scaling of excess acceptances

23. A hypothetical example of a partial offer is set out in Appendix A. Although the hypothetical applies some different assumptions to Figure 2 above, it includes another example of the scaling provisions.
24. The effect of the pro rata scaling provisions is that offerees who send in "excess" acceptances will have a greater proportion of their securities taken up by the offeror than offerees who only accept the offer in respect of the specified percentage of their securities or less. The scaling provisions would not be triggered if every single offeree accepts the offer and all of them accept in respect of exactly the specified percentage of their securities sought by the offeror.
25. Rule 14 provides that the number of securities that an offeree can sell into an offer is determined by the number of securities held by that offeree at the end of the offer period (as recorded in the securities register of the target company). Rule 14 is designed to prevent an offeree from "multiplying" their total acceptances by accepting an offer in respect of the specified percentage of their securities, and then, before the end of the offer period, transferring the balance of their holding to a related party, who then accepts the offer in respect of the specified percentage of the balance.⁵
26. The Code also imposes mandatory conditions on a partial offer:
    1. If a successful offer would result in the offeror holding of the total voting rights in the target company, the offer must be subject to the following conditions:
       1. The offer is approved by the offerees in accordance with rule 10(1)(b) of the Code; and
       2. The offeror receives sufficient acceptances which would, together with any voting securities already held or controlled by the offeror, confer on it the percentage of voting securities approved by the offerees under rule 10(1)(b)⁶;
          or
          
    2. If the offer is for greater than 50% of the voting rights in the target company, the offer must be conditional on the offeror receiving a minimum percentage of acceptances which would, together with any voting securities already held or controlled by the offeror, confer on the offeror more than 50% of the voting rights in the target company.⁷
27. In relation to these conditions, the Panel decided in the GPG Forests/ Rubicon Determination that the "or" between (a) and (b) above definitely means "or", and not "and":⁸

28. The Determination related to a proposed partial offer which was expressed in "alternatives" - the offer was for either, a specified percentage of the target company's voting securities that would, if successful, result in the offeror holding or controlling greater than 50% of the total voting rights; or, if insufficient acceptances were received under that offer, an alternative offer for an unspecified lesser percentage in a range of between 30% to 50% of the voting rights not already held or controlled by the offeror. The alternative offer was subject to the condition that the target company shareholders approved the offeror taking up an unspecified percentage of voting securities within the 30%-50% range. The Panel considered that the proposal breached the Code.⁹

Comparison with Australia

29. Australia's takeovers regulations (Chapter 6 of the Corporations Act 2001) provide for a regime for "proportional" takeovers.
30. Under section 618 of the Corporations Act, a bidder may make an offer for a specified proportion of the securities in a 'bid class' (the class of the target company's securities to which the bid relates). The specified proportion must be the same for all holders of securities in the bid class.¹⁰
31. The bidder cannot scale the acceptances it receives from the target company shareholders. Therefore, for a bidder to obtain the specified proportion of the target company's shares, the bidder must receive acceptances in respect of the specified proportion from every one of the target company's shareholders. In order to achieve a desired shareholding (for example, 50.1%), the bidder would need to make an offer for a higher proportion of each shareholder's shares, so as to account for the possibility that some shareholders might not accept the offer.¹¹
32. A proportional bid is not automatically subject to a requirement that the bid be approved by the target company shareholders (as is the case in New Zealand for partial offers which would result in the offeror having voting control of 50% or less). An Australian company may include proportional takeover approval provisions in its constitution. If it does, the company is prohibited from registering a transfer of securities as a result of a proportional bid unless the target company shareholders pass a resolution approving the bid.¹²
33. Acceptances into a proportional bid are subject to a "look though" provision where securities in the target company are held by a trustee or nominee. Section 653B of the Corporations Act provides that a person who is a beneficial owner of securities which are held by a nominee is treated as if that person held the securities directly in the target company.
34. The Australian partial offer regime was changed in 1986. Previously, a bidder could make a "pro rata" bid whereby the bidder offered to acquire a specified percentage of the shares in the target company. If acceptances were received which exceeded the specified percentage sought under the offer, the bidder would take up a pro rata proportion of each accepting shareholder's shares. There was no facility for the target company shareholders to approve or object to the "pro rata" bid.¹³
35. The reforms in 1986 were introduced because of a concern that "pro rata" partial takeovers coerced target company shareholders into accepting the offer even if the shareholders did not believe the offer to be fair. The reform has resulted in a significant reduction in the number of partial offers made in Australia.¹⁴

PROBLEM IDENTIFICATION

36. The Panel has identified the followings issues in relation to partial offers:
    1. The potential distortion in the scaling of acceptances where shares in the target company are held by a custodian or nominee;
    2. Frequent misstatements in draft offer documentation of the "specified percentage" of shares being sought by the offeror under a partial offer;
    3. Problems with identifying the persons eligible to vote on whether to approve an offeror making a partial offer that results in the offeror having voting control in the target company of 50% or less;
    4. Potential difficulties caused by the percentage of voting rights already held or controlled by an offeror being diluted during the course of an offer;
    5. Potential difficulties for an offeror that wishes to extend the offer period of a partial offer; and
    6. The implication of votes cast by the offeror or its associates to approve an offeror making a partial offer that results in the offeror having voting control in the target company of 50% or less.
37. The Panel seeks the views of practitioners and market participants on these issues. Do you agree or disagree that the issues are problematic? Why do you agree/disagree? The Panel would also appreciate comments on whether there are other problems that have been experienced with the Code's rules on partial offers.
38. The issues are set out in detail below.

Case studies

39. Appendix B to this paper contains a description of each of the partial offers made under the Code to date and any Code-compliance issues that were raised which were specifically related to the nature of partial offers.

Issue 1: Treatment of nominee and custodial holdings for scaling purposes

40. It is a common arrangement in New Zealand for securities in listed companies to be held by nominees or custodians on behalf of the beneficial owner of the securities. The nominee or custodian is the registered holder of the securities, while the underlying beneficial owner enjoys the economic interest in the securities.
41. A nominee or custodian might hold voting securities on behalf of many different beneficial owners. For example, New Zealand Central Securities Depository Limited ("NZCSD") holds securities in listed companies as a custodian on behalf of the participants in the Austraclear New Zealand settlement and clearance system.¹⁵
42. If the partial offer is accepted in respect of more securities than those sought by the offeror, the scaling provisions in rules 12 and 13 of the Code determine the number of voting securities that the offeror must take up from those offerees who have accepted the offer in respect of greater than the specified percentage.
43. The scaling calculation can result in significant distortions if the acceptances of the underlying beneficial owners of securities are aggregated at the registered-holder level (i.e., by the nominee or custodian), as opposed to the underlying owners' acceptances being scaled as if the owners were the registered holders of the securities. If any of the underlying owners accept the offer in respect of less than the specified percentage of their securities, any other underlying owners who accept in respect of more than the specified percentage will have a greater proportion of their securities taken up by the offeror than if those underlying owners had held the securities directly on the register.
44. The distortion is demonstrated in the hypothetical partial offer example attached in Appendix A. The example shows that one shareholder ("C", in the example) has all (100%) of its securities taken up as a result of the hypothetical offer for 37.63% of its securities, by virtue of the distortion caused by C's securities being held by a nominee, together with the securities of other shareholders, one of whom does not accept the partial offer at all.
45. The distortion would not occur if the offeror was permitted to "look through" the holding of a nominee or custodian and treat, for scaling purposes, the acceptances of the underlying owners as if those owners were registered shareholders.
46. Rules 12 and 13 refer to the offeror taking up, in accordance with the scaling formula, acceptances from "the offeree". The rules beg the question as to who is an "offeree" and whether it refers to the nominee/custodian on the Register or the underlying owner of the securities. A look through does not, however, appear to be possible under a literal interpretation of rule 12 of the Code. Rule 43(1) of the Code provides that the "offerees in respect of an offer are the persons shown as the holders of securities in the target company to which the offer relates on the securities register of the target company as at the record date." If rules 12 and 13 are read in light of rule 43(1), the "offeree" for scaling purposes would be the nominee/custodian, not the underlying owner of the securities.
47. If a nominee or custodian is considered to be "the offeree", then rules 12 and 13 do not always produce an equitable scaling of the acceptances of a partial offer. A person whose securities are held by a nominee might have a greater proportion of their securities taken up than if that person held the securities directly in the target company.
48. The distortion issue was raised with the Panel for the first time by NZCSD in relation to the partial offer by Knott Partners LP and certain associated funds¹⁶ (together, "Knott") for Rubicon Limited ("Rubicon") in April 2009.
49. Knott made a partial offer for a specified percentage of 10.83% of the voting securities in Rubicon that it did not already hold or control. NZCSD, as custodian of the Austraclear system, was the registered holder of approximately 85% of the voting securities in Rubicon. NZCSD noted that, as a result of the scaling provisions in the Code, acceptances by persons who are beneficiaries in a nominee arrangement may be scaled differently than if those persons held securities directly on the share register.
50. NZCSD proposed to address the distortion problem by splitting its holding into two "accounts": the first account would represent the securities of those beneficial owners who had accepted Knott's offer in respect of the specified percentage or less; and the second account would represent acceptances in respect of more than the specified percentage of the beneficiaries' securities.
51. NZCSD's proposal would, in effect, achieve a more equitable outcome. The beneficial owners would be treated as if they held securities directly in Rubicon.
52. From a legal perspective, NZCSD's proposal would have had to rely on a purposive interpretation to the word "offeree" in rule 12, so that scaling was applied on a "look through" basis. That is, the acceptance instructions of the underlying beneficial owners would be taken into account for the purposes of scaling, as though the underlying owner was the holder of the securities (i.e. was "the offeree": the person to whom the offer was made). In the end, NZCSD did not apply this approach, based on the view, it appears, of the offeror's New Zealand legal advisers that a literal interpretation of rules 12 and 13 was necessary (i.e. that, strictly speaking, NZCSD was the "offeree").
53. There is, therefore, potential uncertainty as to whether the literal application of rules 12 and 13 of the Code is appropriate. The Panel considers that this uncertainty is undesirable and wishes to consult with market participants on the most appropriate mechanism for addressing the issue.

Issue 2: Misstatements of the specified percentage

54. A partial takeover offer under the Code must be made for a "specified" percentage of voting securities in the target company which are not already held or controlled by the offeror.¹⁷
55. The specified percentage must be correctly calculated because:
    1. It is used to calculate the proportion of acceptances that the offeror must take up in accordance with rules 12 and 13 of the Code;
    2. If the offeror will hold or control 50% or less of the target company as a result of the offer, the specified percentage will be referred to in the approval form sent to offerees for the purposes of voting on whether to approve of the offeror making the offer.¹⁸ The specified percentage will also be referred to for the calculation of the relevant percentage for the minimum acceptance condition required by rule 23(1); and
    3. The specified percentage may be referred to in public announcements made in relation to the offer. Any publication regarding the offer must avoid being misleading or deceptive.¹⁹
56. The Panel has noted six instances (out of a total of 11 partial offers made under the Code) where the specified percentage was misstated by the offeror.
57. In all cases, the misstatement was identified in the draft offer document that accompanied the offeror's notice of intention to make its offer. Therefore, any non-compliance was resolved prior to the offeror sending out the formal offer document to shareholders.
58. In the most recent cases, the Panel has developed a practice whereby the offeror is allowed to state the correct specified percentage in its offer document (rather than re-issuing a takeover notice and beginning the offer procedure again) if:
    1. The target company directors consent to the offer document that is sent to shareholders being different from the draft offer document attached to the takeover notice, to the extent that the specified percentage is correctly stated in the offer document; and
    2. Promptly after such consent being received, the offeror makes a market announcement explaining the error in the draft offer document that accompanied its notice of intention to make an offer.
59. The Panel had previously considered that, if there was a misstatement of the specified percentage, it meant that the draft offer documentation did not comply with the Code in a fundamental respect and had to be immediately withdrawn. The offer process would then be re-started with a new notice of intention that included a draft offer document that referred to the correct specified percentage.
60. If, under the approach referred to in paragraph 48, above, the directors of the target company did not consent to the change being made, an offeror would likely have to start the takeover process again. In a contested takeover, timing can be very important, so this can leave that offeror at a disadvantage while, correspondingly, the rival bidder may have an advantage. Moreover, in a hostile or contested takeover, any potential breach of the Code provides an opportunity for a party to complain to the Panel and to press for regulatory action against the alleged breaches. A misstatement of the specified percentage may, for example, be argued to be a breach of rule 9 (the rule requiring the offer to be for a specified percentage) or of clause 5 of Schedule 1 of the Code (which requires the offer document to set out all of the terms of the offer) and/or rule 64 of the Code (which prohibits misleading or deceptive conduct).
61. Given that misstatements appear to be a relatively regular occurrence, the Panel wishes to consult with market participants and practitioners on the best way to ensure that misstatements do not recur in the future.