Issue 3: Identity of the "offerees" for the purposes of voting under rule 10(1)(b)

62. If a successful offer would result in the offeror holding 50% or less of the total voting rights in a target company, the offer must be conditional on (amongst other things) the offer being approved by the offerees in accordance with rule 10(1)(b) of the Code.
63. Rule 10(1)(b) of the Code provides:

64. Thus, under rule 10(1)(b), a partial offer which would result in the offeror having voting control in the target company of 50% or less must be approved by the offerees (in other words, approved by the target company shareholders other than the offeror). A simple majority in favour of the offer, of votes that are cast, is required for the approval (that is, more votes must be cast in favour than votes cast against, and the voting rights of the offeror and its associates must be disregarded for this purpose). The offerees are not compelled to vote but any vote is only valid if it is received by the target company before the close of the offer period. The outcome of the vote is determined once the offer is closed.
65. Rule 43 of the Code provides:

66. Rule 43 specifies which persons are "offerees" for the purposes of making an offer under the Code. In other words, rule 43(1) defines the persons to whom the offer document must be sent within three days of the date of the offer (rule 43B). In addition, rule 3(1) of the Code (the interpretation clause) defines "offeree" as "a person to whom an offer is made."
67. Accordingly, a person is an "offeree" if:

68. By considering rules 3(1) and 43(1) together with the voting procedure under rule 10(1)(b), it appears that any person who holds voting securities in a target company from the time of the record date of a partial offer is a person who is entitled to vote in the offer approval process under rule 10(1)(b).²⁰
69. However, during the offer period, a person who holds voting securities in the target company as at the record date ("the transferor") may transfer some or all of its securities to a third party ("the transferee"). As a result of rule 43(2), the transferee is also entitled to be sent the offer that has been made by the offeror. The transferee is, therefore, an "offeree" for the purposes of the offer.
70. The implication of rule 10(1)(b)(iii) is that the transferee, who is an "offeree", appears to also be entitled to vote on whether to approve of the partial offer (the offer document must be accompanied by an approval form: rule 10(1)(b)(ii)). The problem, however, is that the transferor, despite having disposed of its shares, may also be considered to be an "offeree" because:

71. The issue then is, if voting securities in a target company are traded during the course of a partial offer that is conditional on shareholder approval, whether the transferor or the transferee (or both) is (or are) entitled to vote. On a strict reading of the Code, it could be agreed that both the transferor and the transferee would be entitled to vote under rule 10 in respect of the same parcel of shares because both persons satisfy one or other of the Code's definitions of "offeree". In other words, the shares could be double-voted.
72. In relation to the recent partial offers for Auckland International Airport Limited ("AIAL") and Rubicon, the Panel expressed its view that only those persons who are the registered holders of target company voting securities as at the record date should be entitled to vote for the purposes of rule 10(1)(b). The Panel took this view because it was consistent with the policy of shareholder voting under the Companies Act 1993. The Panel's view provided the most transparent process possible, under the current wording of the Code, for ensuring that there could be no double voting of shares that were traded during the offer period.
73. In the AIAL and Rubicon cases, the Panel's view was accepted by the parties to the relevant transactions. The difficulty, however, is that the view is not binding and relies on the cooperation of the parties. Further, that view remains open to a challenge on the basis of the apparent inconsistencies in the drafting of the Code. The Panel is interested in the suggestions of market participants on the most effective means for resolving this issue.

Issue 4: Dilution of offeror's shareholding during offer period

74. As discussed above, a partial offer must be made for a specified percentage of voting securities in the target company not already held or controlled by the offeror. The calculation of the specified percentage depends upon the percentage of voting rights in the target already held or controlled by the offeror and the percentage of the total voting rights in the target company that the offeror wishes to acquire through the offer (see Figure 1 above). The specified percentage is calculated as at the date of the offer²¹ and is thereafter fixed for the offer's duration.
75. A potential risk for an offeror is that, subsequent to the date of the offer, the percentage of voting rights in the target company already held or controlled by the offeror is diluted (for instance, as a result of a non-pro rata allotment of voting securities by the target company). If the offeror's percentage holding has been reduced as a result of the dilution, this may mean that even if the offeror receives acceptances in respect of voting securities equal to the specified percentage, the offeror may not reach its desired total percentage of the voting rights in the target company.
76. The dilution issue is of particular importance in relation to the minimum acceptance condition in an offer. Rule 23(1) of the Code provides:

(a)

more than 50% of the voting rights in the target company; or

(b)

in the case of a partial offer, any lesser percentage approved under rule 10(1)(b).

77. Rule 23 requires an offer made under the Code to be subject to a minimum acceptance condition. The minimum percentage of acceptances is calculated with reference to the total percentage of voting rights in the target company that the offeror would hold or control if the offer is successful. If that total is 50% or less, the minimum percentage of acceptances must be the percentage that offerees approve under rule 10. If the total is more than 50% (i.e. a full offer, but could also include a partial offer), the minimum acceptance percentage may be any percentage greater than 50%.
78. The effect of a dilution may be that, even though the offeror receives acceptances in respect of voting securities equal to the specified percentage, when the acceptances are taken together with the number of voting rights already held or controlled by the offeror (which now represents a lower percentage than the offeror had as at the date of the offer), the acceptances may not confer enough voting rights to satisfy the minimum acceptance condition in the offer. In other words, but for the diluting effect of the allotment by the target company during the offer period, the offeror would have been able to satisfy the minimum acceptance condition.
79. An offeror might anticipate a dilution prior to making its offer if it can ascertain whether the target company has options or convertible securities on issue which can be converted into voting securities. An offeror, in the case of a partial offer that would result in the offeror holding or controlling more than 50%, can mitigate the risk of dilution by:
    1. Setting its specified percentage for the offer high enough such that any dilution would not create a risk that of non-fulfilment of the minimum acceptance condition; and
    2. Setting the percentage for the minimum acceptance condition lower than the total voting control percentage that the offeror would have on obtaining the specified percentage without a dilution²² (provided, to comply with rule 23(1)(a), the minimum acceptance percentage is set at more than 50%).
80. Dilution is a more significant problem where an offeror makes a partial offer that would confer on the offeror voting control of 50% or less in the target company. With such an offer, the minimum acceptance condition for the purposes of rule 23(1) must be "any lesser percentage) approved under rule 10(1)(b."
81. Rule 10(1)(b) is set out at paragraph 63 above. For present purposes, it is noted that the offer document "must be accompanied by a separate approval document providing for the offeree to approve or object to the offeror making an offer for 50% or less of the voting rights in the target company".²³
82. The minimum acceptance percentage for a partial offer which would confer on the offeror voting control of 50% or less is fixed to the percentage approved by the offerees under rule 10. The percentage approved by the offerees is the sum of the percentage of voting rights already held or controlled by the offeror (as at the record date) together with the specified percentage in the offer. Therefore, if the offeror is diluted during the offer, it will be impossible for the offeror to satisfy the minimum acceptance condition, even if the offeror receives acceptances equal to the specified percentage.
83. It could be argued that rule 10(1)(b) does not require the approval form to state an exact percentage to be approved by the offerees. The practical implication, however, is that, by reading rule 10(1)(b) in light of rule 23(1)(b), the approval form must state precisely the total percentage of the voting rights in the target company that could be conferred on the offeror as a result of the partial offer. Rule 23(1) refers to, for the purposes of the minimum acceptance condition in a partial offer, "any lesser percentage approved under rule 10(1)(b)". If the approval form only referred to the offeree approving or objecting to the offeror making an offer for "50% or less of the voting rights in the target company", it would be impossible to calculate a percentage for the purposes of the minimum acceptance condition.
84. The purpose of fixing the minimum acceptance condition to the percentage to be approved by the offerees is two-fold:
    1. The offerees (i.e. target company shareholders), under a partial offer, do not have the opportunity to completely exit from their holding in the target company. The voting procedure, therefore, allows the offerees to approve or object to a change of control of the company in which they retain an interest. They must be informed as to what level of change of control will occur, and
    2. The condition incentivises the offeror to set an offer consideration which reflects the price of obtaining approval of the offerees (in other words, an "approval premium").
85. The offer by Canada Pension Plan Investment Board ("CPPIB") for Auckland International Airport Limited ("AIAL") in 2007/08 is the first example to date where the dilution problem has occurred.²⁴ The problem was identified in the draft offer documentation which accompanied CPPIB's announcement of its intention to make a partial offer for 39.53% of the voting rights that it did not already hold or control in AIAL. CPPIB already held a small percentage of AIAL voting rights, and intended to increase to a 40% holding through the partial offer.
86. It was likely that new shares would be issued by AIAL during the offer period as a result of the exercise of options held by employees. If all of AIAL's outstanding options were exercised during the offer period, CPPIB's final shareholding (upon taking up the specified percentage of 39.53%) would be 39.99%.
87. CPPIB proposed to state the minimum acceptance condition in the offer as follows:
    
    "This Offer is further conditional on the Offeror receiving acceptances by no later than the Closing Time in respect of not less than the Specified Percentage of Outstanding AIAL Shares which will, if those acceptances are received, based on the number of Shares on issue as at [the record date], confer on the Offeror 40% of the voting rights in AIAL"
88. The proposed wording was intended to address a dilution of CPPIB's shareholding during the offer period. The specified percentage in CPPIB's offer would always remain the same (39.53%). But, because CCPIB already held voting rights in AIAL, if the existing voting percentage was diluted during the offer period, it would be impossible for CPPIB to reach the minimum acceptance percentage of 40% because it could not acquire (under the offer) any more securities than the specified percentage would confer.
89. The Panel considered that the draft condition appeared to be an attempt to contract out of the Code. The Panel thought it would be more appropriate to grant an exemption to resolve the anomaly. Accordingly, after an application by CPPIB, the Panel granted an exemption from rule 23(1)(b) of the Code to enable CPPIB to state a minimum acceptance percentage of 39.99%, a percentage which was different from the 40% percentage which was to be approved under rule 10(1)(b).²⁵