Takeovers Panel

UPSTREAM TAKEOVERS

A CONSULTATION PAPER ISSUED BY THE TAKEOVERS PANEL

April 2009

Option 3 - complete exemption

102. Option 3 would provide a class exemption from rule 6(1) of the Code for an acquisition that results from another acquisition of voting securities in an entity listed on an approved exchange.

Analysis of Option 3

103. Under Option 3 each of the upstream acquisitions already considered by the New Zealand Panel (discussed above) would have been exempted from compliance with the Code in respect of the downstream acquisition. Even in the 2004 case of Origin, where the acquisition of Contact was the purpose of the upstream acquisition, Origin could have legitimately relied on the Option 3 exemption.
104. This option enables the unrestricted acquisition of a Code company as a downstream acquisition as long as the upstream acquisition takes place in New Zealand or another market which provides a comparable level of investor protection. The Panel would need to define the financial markets that have a comparable level of investor protection. As already stated, the Australian Class Order 02/259, which names foreign stock markets having a comparable level of shareholder protection to the Australian law, could be taken into account.
105. This option has the advantage that transactions would be efficient and New Zealand takeover law would be consistent with the principles of international comity.
106. However, the Panel would have no powers in respect of an upstream takeover whose main purpose was to take control of the downstream Code company or where the shares of the Code company comprise a substantial part (for example, more than 50%) of the assets of the upstream target. Unlike in Australia, the Panel does not have a statutory power to declare "unacceptable circumstances". The Panel would therefore have no power to intervene if an upstream acquisition was undertaken for the purpose of acquiring the downstream Code company without complying with the Code's rules for shareholder participation and a regulated takeover procedure. This option leaves the shareholders in the downstream Code company with a significant gap in their regulatory protections. It also tips the balance of cost/benefits under the Code almost totally in favour of potential acquirers.
107. Consequently, this option could result in situations where shareholders were not treated fairly. However, it appears to meet well the objectives of efficiency, international comity and transparency.

Option 4 - complete exemption except where "unacceptable circumstances", current Australian position

108. A further option would be to have a complete exemption as set out in Option 3, subject to the condition that the Panel may intervene if it considers that there are "unacceptable circumstances", for example, that the upstream takeover is being undertaken for the purpose of acquiring shares in the downstream Code company.

Analysis of Option 4

109. Option 4 would be consistent with the principles of international comity and efficiency and would bring New Zealand in line with Australia which has a complete exemption for upstream acquisitions but has a Panel with the power to declare "unacceptable circumstances". The matters that the Panel would need to take into account before being able to declare that circumstances were unacceptable would likely mirror those prescribed for the Australian Panel (such as the effect of the circumstances on control of a company or on an acquisition in the company. The impact of any such declaration on the public interest, and other relevant policy considerations should also be required to be taken into account by the Panel).
110. Option 4 would provide adequate protection for shareholders and could ensure fair treatment of shareholders in a takeover. However, the Panel would have quite difficult decisions to make, in a commercial context where the law was being complied with by the parties, when considering whether or not to make the declaration sought (or of its own motion).
111. The power could create uncertainty in the New Zealand market due to the broad discretion given to the Panel to intervene in an otherwise lawful transaction. This could impact on market efficiency and may be argued to lack transparency. However, it appears to be accepted in Australia, where the power to declare unacceptable circumstances has been in operation for some time.
112. There may be New Zealand conventions of regulatory process in relation to this option that would require the empowering of such a broad discretion to be included in the Takeovers Act. What is not clear is whether such a broad discretion would be acceptable, either to the New Zealand public or in policy terms, given the New Zealand approach to regulation.

CONCLUSION

113. The Panel wishes to adopt a clear and transparent policy on upstream acquisitions, to provide certainty to the market and to assist the efficiency of market transactions.
114. The Panel recognises that, for each of the options above, it would still need to consider, on a case by case basis, transactions that would fall outside of the policy that the Panel settled on. In such cases, the Panel might consider whether to grant an exemption subject to a condition that the upstream acquirer sell down to 20% or less, or make a follow-on offer for the downstream Code company. Where an exemption subject to a follow-on offer is granted, the Panel would still be faced with the difficulties outlined in this paper, in particular, in deciding on the independent expert's role in determining the price for a follow-on offer.
115. It does not appear to be appropriate to maintain the status quo. New Zealand is out of step with other countries in this area, including with our closest significant neighbour, Australia.
116. It is a concern that upstream entities can effectively become "takeover proof" by holding or controlling shares in a New Zealand Code company. Furthermore it seems extremely inefficient to require compliance with the Code in respect of a downstream acquisition when the upstream acquirer does not wish to obtain control of (and may even prefer to sell off) the voting rights in the downstream entity.
117. A complete exemption may not be appropriate, as it would provide a mechanism for parties to avoid the Code where an upstream acquirer's purpose is to acquire the downstream entity. A complete exemption has been successful in Australia, but that is in the context of the Australian Panel having the power to declare "unacceptable circumstances".
118. An exemption subject to an "unacceptable circumstances" condition may result in too much uncertainty (and may, in the context of the New Zealand regulatory design rules, be difficult to achieve).

SUBMISSIONS

119. The Panel welcomes your submissions on this paper. Please see the questionnaire at Appendix 3.