Statement of Intent: 2006/2007 - 2009

Statement of Intent: 2006/2007 - 2009

STATEMENT OF INTENT

2006/2007 - 2009

3. THE PANEL'S SPECIFIC IMPACTS, OUTCOMES OR OBJECTIVES

3.1

The "Vote Commerce" section of the Government's annual appropriation statement states that the Panel contributes to economic growth because "enforcement of the Code ensures equal treatment of shareholders and a transparent takeover process, resulting in confidence of domestic and international investors in the integrity of our market." This is a Government outcome. "Outcome" is defined in the Public Finance Act as:

A state or condition of society, the economy or the environment and includes a change in that state or condition (s2(1) of the Public Finance Act).

3.2

The Panel is a small body administering a specialised area of the law. The Panel aims to achieve a number of impacts on the Government's target outcome through its work. "Impact" is defined in the Public Finance Act as:

The contribution made to an outcome by a specified set of outputs, or actions, or both (s2(1) of the Public Finance Act)

3.3

The Panel's overall objective is that of being an effective and efficient regulator of the takeovers market respected by market participants.

3.4

In managing its resources the Panel puts the highest priority on enforcement, exemption and approval matters. This is because these activities are generally transaction orientated and the Panel must be ready and able to act quickly and effectively in the market as circumstances demand. The Panel also gives a high priority to its function of keeping under review market practices for the purpose of recommending changes to takeovers law to the Minister. However, at times pressure on resources from exemption and enforcement activity has meant that policy work with a longer-term focus has had to be given less attention. The Panel also ensures that its website is kept current and that changes to the law and the Panel's policies are quickly communicated to the market and published.

The Panel's contribution to the relevance and effectiveness of the Code

3.5

The effectiveness of the Code in promoting economic growth depends both on the relevance of the framework of the Code itself and the effectiveness of the Panel in administering its provisions, covering in particular enforcement, exemptions and approvals.

3.6

The Panel drafted the initial Code with a view to providing as much flexibility as possible while protecting the interests of shareholders. As an example, unlike other Codes, partial bids ¹ are allowed (sometimes with shareholder approval). Thus a bidder can secure control of a target company without having to make an offer for the whole company.

3.7

In 2003 the Panel recommended a number of technical changes to the Code which were endorsed by the Government in June 2005 following review by the Ministry. These changes are expected to come into force later in 2006 and should aid the functioning of the takeovers market.

3.8

The Panel does not see any need for a fundamental review of the Code's main provisions. However, the Panel has as a function to keep under review the terms of takeovers law, including the Code.

3.9

The Panel is able to recommend changes to the Code but is not able to implement them. The Panel is concerned at the time it has taken to implement what it considers are desirable and necessary changes to the Code and would like to see this process streamlined for urgent cases.

3.10

As part of the Panel's function of keeping the provisions of the takeovers law under review, the Panel also keeps under review practices relating to the takeover of code companies. Most recently the Panel has focused attention on market transactions involving schemes of arrangement and amalgamations effected under the Companies Act 1993.

3.11

The outcome sought by the Crown for its takeovers law is a subset of its overall goal of creating a growing, inclusive and innovative society for the benefit of all. Takeovers law aims to provide for equal treatment of shareholders and a transparent takeover process, giving confidence to domestic and international investors in the integrity of the market.

3.12

The impact arising from the Panel's function of keeping the Code under review is improvements in the efficiency of the Code by identifying areas of the Code which require correction or would benefit from improvement, developing proposals to achieve those corrections or improvements, seeking public comments on those proposals, and making recommendations to the Minister of Commerce to achieve those changes.

Enforcement of the Code

3.13

The Panel has significant enforcement powers in relation to the Code. Enforcement of the Code's provisions is the largest of the Panel's outputs and is expected to remain so.

3.14

The theoretical aim of enforcement is to achieve 100% compliance with the Code. While that obviously will never happen, the Panel's interventions can result in a high level of compliance with the Code by market participants.

3.15

Therefore the intended impact of the Panel's enforcement function is the continuing improvement in the level of compliance with the Code by market participants.

3.16

The Panel achieves this impact in a number of ways, detailed later.

The granting of exemptions

3.17

The Panel's second most significant output in resource terms relates to the granting of exemptions.

3.18

The Code is a relatively brief document, with far-reaching provisions. As a result there are occasions where the Code's provisions do not cover particular transactions or circumstances, or where strict application of the Code would produce unintended or unreasonable consequences.

3.19

This was recognised by giving the Panel the ability to grant both individual and class exemptions. Individual exemptions may be retrospective.

3.20

The Panel's power to grant exemptions is constrained by the requirement that any exemption be both appropriate and consistent with the objectives of the Code. A Practice Note issued by the Panel in January 2005 outlining the approach followed by the Panel in considering applications for exemption states:

The Panel will, therefore, in deciding whether an exemption is appropriate, consider whether compliance with the Code is possible and whether compliance would create an inappropriate, unreasonable or unintended result.
Furthermore, the exemption itself must be consistent with the objectives of the Code as embodied in the provisions of the Code. Consequently the conditions upon which exemptions are granted are designed to preserve the underlying purpose and intent of the relevant provisions of the Code

3.21

One such example is where a person makes a scrip bid, that is offers securities such as shares, for shares in the target company. Rule 20 of the Code requires that the same consideration be sent to all shareholders in a takeover offer. However where some shareholders are living overseas the New Zealand security offer documents (prospectus and investment statement) may not comply with the securities laws of the countries in which those shareholders reside. The Panel's Practice Note states:

A number of offerors making scrip offers have sought exemptions from rule 20 to allow them to offer overseas shareholders cash only rather than scrip. In the absence of such exemptions offerors would be required to ensure that their offer complies with securities laws in every country where target company shareholders reside. Compliance with such overseas requirements as well as New Zealand securities law requirements increases the cost and complexity of making a scrip offer for a New Zealand code company.
… exemptions in respect of scrip offers and overseas shareholders are an example of addressing a situation where the provisions of the Code have an unintended and undesirable outcome. Scrip offers are an important part of the takeovers market and yet without an appropriate exemption the existence of overseas shareholders would have an undesirable effect on the ability to make scrip offers.
Consequently the Panel has a policy that will enable it to grant exemptions from rule 20 in respect of offers to overseas shareholders but only if it is satisfied that the number of overseas shareholders in any jurisdiction is extremely small and the alternative consideration to be offered to overseas shareholders is equivalent to that being offered to remaining shareholders. The Panel's exemptions will not extend to jurisdictions where there are a significant number of overseas shareholders or where it is known that the offer can be properly made using the New Zealand offer documents. This ensures that the purpose of rule 20 is preserved.

3.22

The Panel has granted exemptions to a number of offerors. It has approved a number of mechanisms to ensure that overseas shareholders receive equivalent consideration for their shares to that received by those living in New Zealand.

3.23

The intended impact of the Panel's exemption function is the improvement in the functioning of the market by allowing otherwise legitimate market practices to occur while still observing the principles of the Code.

The approval function

3.24

The Panel is required to approve the appointments of independent advisers where these are needed under rules 18, 21 or 22 of the Code or by the terms of an exemption. The Panel is also responsible for appointing independent experts where these are required by rule 57 of the Code.

3.25

The role of the independent adviser is very important under the Code. The Panel seeks to ensure that appointed advisers are both independent and competent to do the job required. The Panel issued a Guidance Note about the role of independent advisers under the Code in July 2003 to assist advisers in preparing their reports. The Panel routinely reviews draft reports and makes suggestions to advisers on how to improve them. The Panel also has continuing discussions with advisors through general "feedback" meetings which provide the opportunity for dialogue about any issues of concern.

3.26

In one or two instances the Panel has told advisers that they will not be approved for further Code assignments.

3.27

The intended impact of the Panel's role in relation to the approval of independent advisers is the improvement in the quality of advice given to recipients of takeover offers and to shareholders entitled to vote to approve Code-related allotments and acquisitions.

Promoting public understanding of the law and practice relating to takeovers

3.28

The Panel has as a function to promote public understanding of the law and practice relating to takeovers.

3.29

Takeovers law impacts on people in many ways. Some are involved as bidders or shareholders of bidders. Other interested parties include shareholders in a target company.

3.30

Takeovers give rise to many issues. Sometimes they are simply procedural. Sometimes wider economic issues of resource use or regional employment can arise where a takeover involves infrastructure assets or assets in sectors undergoing significant restructuring.

3.31

Recently concerns have been expressed at the number of listed companies taken over by private entities or offshore companies, with a consequent loss of companies from the NZX.

3.32

The provisions of the Code are aimed at providing a transparent process with adequate time to ensure that the various issues are properly considered.

3.33

The intended impact of the Panel's function of promoting public understanding of takeovers law is the improvement in public understanding of takeovers law over time.

International liaison

3.34

The Panel has as a function to co-operate with overseas takeovers regulators on matters where it can use its powers to assist such regulators.

3.35

The Panel has a high level of contact with the Australian Takeovers Panel because the Panel's Chairman is a member of the Australian Panel, and a member of the Australian Panel is also a member of the New Zealand Panel.

3.36

Members of the Panel executive also have good working relationships with the relevant staff of the Australian Panel and of the Australian Securities and Investments Commission.

3.37

The Australian Panel has promoted the formation of an informal group of international takeovers regulators. The group has met twice, in Melbourne in 2002 and in Johannesburg in 2005. The New Zealand Panel has been represented at both meetings and is supportive of the Australian Panel's efforts to bring more formality to the ongoing arrangements.

3.38

The intended impact of the Panel's international activities is the improvement in the level of co-operation and understanding between international takeovers regulators.

1 Partial bids are bids for less than 100% of the voting rights in the target company.

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