INTRODUCTION

The partial bid does not appear to be the subject of much discussion or debate. In preparing for this paper, I have had some research done as to the extent to which the partial bid has been utilised in recent times.

In New Zealand where the Takeovers Code has been in operation for just over a year, we have had two, one of which did not proceed as a result of various deficiencies with the offer. It appears that under the City Code in London, there are no more than one or two a year. In Australia, I understand that there have been six partial bids during the past year. The research showed very little activity with partial bids in the US.

It is not surprising that partial bids are not a regular feature of takeover activity. Clearly, it is more common for bidders to seek full control and consequently to make a full bid. Commercial reasons for a bid are normally built around proposals where full control is desirable. Mergers and reconstructions of businesses need the acquisition of total control. A full bid may, of course, often lead to something less than the acquisition of total control but unlike the position with a partial bid, total control is the desired outcome with a full bid.

Nevertheless, the partial bid has always been one of the tools available to facilitate change in the control of corporate entities. They have, in appropriate circumstances, facilitated the entry of a new shareholder, sometimes seeking absolute control but sometimes seeking a lesser percentage which may or may not amount to effective control.

Some of these bids may in fact be facilitated by management. They may reflect the desire to introduce a particular shareholder which has certain skills or technology which may be the subject of parallel commercial arrangements. Often of course, this type of arrangement can be implemented by an acquisition or an allotment of shares, but the partial bid was an alternative approach.

With the restrictions of present day codes upon the acquisition or allotment of block shareholdings which may raise issues of control or effective control, the alternative of a partial bid should have some attraction if the principles of equal opportunity and equal treatment can be ensured.

There are a number of questions about the future role of partial bids. What is the current attitude of takeover regulation? Is takeover regulation itself restricting the use of the partial bid? Should takeover regulation seek to facilitate partial bids? Is the partial bid of more benefit in some jurisdictions than others?

THE NEW ZEALAND POSITION

New Zealand is, of course, a small jurisdiction and not many of you will have much knowledge of our code. However, the New Zealand experience and the approach taken in New Zealand will, I hope, be of some interest in considering the role of the partial bid.

First of all, a little background about the market in New Zealand. Listed companies have been dominated by ownership blocks which have actual or effective control of the company. Records in 2001 showed that in over half of the listed companies 30% or more of the shares were held by one or two members. Consequently, control was commonly passed by a direct sale from one shareholding block to another with the seller receiving the premium for control and the remaining shareholders, not necessarily a minority, being left on the sideline.

Furthermore, by means of a stand in the market, it was possible for a controlling shareholding to be purchased virtually overnight where the larger players were inevitably in the front of the queue. It was very easy for bidders to obtain an initial holding and creep through to control with a limited premium for control being paid to the holders of the larger blocks.

This is, of course, a common story in a number of jurisdictions around the world which provided the basis for takeover regulation. It was less of a problem in the USA market where holdings are more widely spread. However, the effect on minority shareholders was particularly dramatic in New Zealand with such a large number of listed companies having a block of controlling shareholders. It was a process of "pass the parcel" between dominant shareholders, while the minority shareholders were left unprotected.

You would have thought that in this situation regulation would have appeared relatively early in New Zealand. After endless debate in the 1980s a takeovers panel advisory committee was formed in 1991. It prepared a code which was presented by the official panel to the Government in 1994. However, the strength of the anti-regulation lobby was such that the code was not adopted until New Zealand's present government brought it into force in July 2001.

The rationale for the opposition was that takeovers are value enhancing and that takeovers codes are designed to inhibit takeovers and protect management from change. Hence, in terms of economic efficiency, takeovers codes were represented as undesirable. The lobby relied particularly on writings by academics from the USA.

You will, no doubt, be aware that the design of takeovers regulation in the USA, a mixture of state and federal law, is fundamentally different in concept from the type of code which we now see in Australia, New Zealand and the UK. Some of the State codes were overtly designed to restrict takeovers with the objective of retaining what was seen as essential industries for particular States which were fearful of their loss in the event of a takeover.

The reason for detailing this background is to explain that there was a real concern in drafting the code in New Zealand to ensure that it was not seen as restricting takeover activity but rather as facilitating a fair and orderly takeovers market. We sought to enhance contestability for control and to provide as much flexibility in the process as possible. Section 20 of our Takeovers Act required the panel formulating the code to consider the following as the objectives of the code:

1. Encouraging the efficient allocation of resources;

2. Encouraging competition for the control of specified companies;

3. Assisting in ensuring that the holders of securities in a takeover are treated fairly;

4. Promoting the international competitiveness of New Zealand's capital markets;

5. Recognising that the holders of securities must ultimately decide for themselves the merits of a takeover offer;

6. Maintaining a proper relation between the costs of compliance with the code and the benefits resulting from it.

The code is built around a 20% threshold, beyond which a bidder cannot progress except in compliance with the code. There is a minimum acceptance condition requiring that the bidder must acquire more than 50% of the voting power.

Shareholders can approve, at a general meeting, allotments and acquisitions by specified parties with interested parties being unable to vote. In all cases, a report from an independent adviser is required to accompany the target company statement or the notice of meeting, as the case may be. Creep of 5% is limited to the 50% to 90% range with a two way compulsory acquisition requirement at 90%.

Unusually, there are no pricing rules other than the basic requirement that the same price is offered to all shareholders. The panel anticipated that the 20% threshold, minimum acceptance condition and inability to creep between 20% and 50% would, where warranted, result in a premium price. This balanced three different statutory objectives: encouraging the market for corporate control, fair treatment of shareholders, and maintaining proper relation between costs and benefits of compliance.

Against this background, the code sought to facilitate as far as possible the approach to partial bids that existed before the introduction of the code.

1. Partial bids are permitted as of right.

2. The bid permits shareholders to tender all or any part of their shareholding Scaling applies if there are over-subscriptions.

3. The bid must be made for a specified percentage of the voting securities of the target company.

4. The minimum acceptance condition that applies to full bids also applies to partial bids. Accordingly, the bid must be for voting securities which will result in the bidder controlling more than 50% of the voting rights in the target company.

5. It is, however, possible for the partial bidder to set a lower acceptance condition where the lesser percentage is approved by shareholders. Approval is obtained if the shareholders approving the making of the offer for the lesser percentage hold more voting rights than the shareholders opposing the making of the offer. The approval document is a different document from the acceptance document and is forwarded with the offer.

Subject to the special provisions mentioned above, the partial bid must comply with the same rules for a full bid. This includes the requirement for an independent adviser's report to accompany the target company statement.

ISSUES ARISING WITH PARTIAL BIDS

One of the key concerns with partial bids is that they can be seen as coercive, namely placing target shareholders in the position that by not accepting they may not share in any premium for control. This is also a concern with a full bid, however the partial offer enables the bidder to exert the same pressure at a lower cost. They can also be seen as a device for effecting a change of control without payment of a premium.

Finally, there is the issue as to whether control should be able to pass under a bid where there is no opportunity for a shareholder to exit the company in full if it so desires.

However, these are not seen as significant problems under the New Zealand Code. To begin with, the concept of fair and equal treatment is promoted by the requirement that the partial bid be made to all shareholders on the same terms and conditions with scaling in the case of over- subscriptions. The minimum acceptance condition forces a premium for control ensuring that a partial bid cannot be used as a means of creeping to control. Shareholder approval provides further protection where the partial bid is to achieve a total shareholding of less than 50%.

There is, however, one area of compromise. Where a bid aimed at achieving more than 50% is over-subscribed, some shareholders who would have preferred to exit the company completely may, by virtue of scaling, be unable to do so.

This is balanced by the fact that the retention of a viable partial bid procedure further facilitates the operation of the market for corporate control while safeguarding the interests of minority shareholders who are in the same position as all other shareholders. Unlike the City Code approach, the Takeovers Act does not identify exit as a specific objective.

In New Zealand, the result is seen, therefore as fulfilling the basic principles of fairness and equal treatment , and enhancing contestability and economic efficiency in the takeovers market.

OTHER JURISDICTIONS

The approach in other jurisdictions varies. These variations may be influenced by the particular nature of the code, historical factors or economic or cultural considerations.

The Australian approach to partial bids is quite different. Hopefully, as part of the discussion of this paper, the Australian representatives will be able to provide a better background than I can of the Australian position.

A key difference in Australia is that partial bids must be strictly proportional. Hence, acceptances can be only in respect of the percentage sought. By its nature, it is a bid for a particular percentage from each shareholder rather than a particular percentage of the total votes in the target company. Clearly, as there can be no over-acceptances, there is no ability to compensate for non-acceptances, as is the case in New Zealand. Here, the percentage achieved in total will inevitably be less than the percentage sought from each shareholder.

In New Zealand we thought that this was an unnecessarily restrictive approach reducing the viability of the partial bid in the operation of the market for corporate control.

This approach may be influenced by the fact that there is no minimum acceptance condition which would mean that a number of the potential abuses of partial bids would be of greater concern in Australia. Australia also permits creep between 20% and 50%.

I understand also that some Australian companies have amended their constitutions to require shareholder approval for partial bids. In particular, I believe that BHP Billiton Ltd, Fosters Group Ltd and Woolworths Ltd have such a provision. This resembles the "control share acquisition" requirement found in some state takeover codes in the USA and in the constitutions of some companies in the USA.

The City Code is different again. Here also, I will be interested to hear comments from our friends from London as to how they see the position.

From my research, there are certainly similarities between the New Zealand Code and the City Code.

As in New Zealand, the partial bid is for a percentage of total shares, subject to a scaling requirement in the case of over-subscription. There is also an acceptance condition. Offers which would increase the bidder's holding to 30%-50% must be conditional on acceptances of no less than the target number of shares. Shareholder approval is required where the partial bid is to increase the bidder's holding to more than 30%. In contrast, in New Zealand shareholder approval is only required where the bid is for less than 50%.

Furthermore, under the City Code the shareholder approval provision is more demanding in that the majority is calculated from the total number of shares not held by the bidder, whereas in New Zealand it is from the total number of votes cast. There is also an overriding condition that all partial offers require panel consent which may in itself indicate a different attitude from that in New Zealand.

Certainly, there are similarities between the London Code and the New Zealand Code but it can be seen that the New Zealand Code is still more permissive. I understand that the mandatory bid rule under the City Code, with its strong emphasise on the exit principle, came at a time when there were no compulsory buyout provisions. It may be this had some effect on the attitude to partial bids and the perception of possible locked in minorities.

I have not undertaken much research on the USA position where the takeover regime is very different. The federal regime permits partial bids, imposes a scaling requirement, and extends the shareholder withdrawal right to the end of the offer period. Some state statutes require shareholder approval for voting control shares or for any merger or reorganisation following a successful partial bid.

Partial bids are certainly seen as potentially coercive. I understand that under Delaware law the board is probably warranted in undertaking defensive tactics to protect shareholders from coercive partial bids. It may be that this parallels the attitude in Australia as indicated by the restrictions being place in some constitutions.

ARE PARTIAL BIDS NECESSARY?

As I have said, in New Zealand we saw the partial bid as a tool which had existed prior to regulation and one which we considered should be preserved subject to protections to avoid abuse. The approach in Australia does not seem so supportive and I sense that the City Code also has reservations.

I am not too familiar with other European jurisdictions but I understand that the Thirteenth Directive outlawed partial bids in connection with mandatory offers under Article 5; other articles anticipated that a voluntary offer could be made for less than all the shares.

It may well be that in larger jurisdictions with companies with a wider spread of shareholdings, partial bids are either not seen as particularly important or the concern with potential abuse produces regulation which is of a restrictive nature.

One of the debates that is taking place in the area of takeover regulation is whether or not there should be greater uniformity. There is already a high degree of conceptual uniformity in the desire to achieve fairness and equality and to protect minority shareholders. However, it may well be that whilst takeover regulations should move towards agreement on basic principles, there should be flexibility to take account of the varying requirements of different jurisdictions and their separate markets and economies.

In New Zealand, for example, investors have been used to holding shares in companies which are controlled or effectively controlled by block shareholders. The code has eliminated the practice of passing of control without reference to all shareholders and provided protection for minorities. We have improved contestability in that a full bid is possible where there is a shareholding between 20% and 50% as that shareholder cannot now creep to control.

These changes, however, have not meant that in New Zealand we wish to eliminate the possibility of large shareholdings with effective control of a listed company. We are used to that with a number of government privatisations. We are also used to that with significant shareholdings held by offshore companies.

In New Zealand we are not averse to having substantial shareholdings which may be controlling shareholdings provided that all shareholders are treated fairly and equitably and are part of any takeover process.

This leads me to wonder whether similar considerations can or should apply in other jurisdictions. It may well be that there should be flexibility in takeover codes enabling various jurisdictions to take a more supportive approach to the partial bid. Possibly the excesses of the past have led to partial bids being looked at too negatively. It is interesting that whilst there have been continuing changes in takeover regulation and also in corporate law, there has not been a great focus on the partial bid.

CONCLUSION

As you can see, I have had a particular interest in contrasting a permissive approach to partial takeovers in New Zealand with what I perceive to be quite different approaches in some other jurisdictions. It seems to me that many of the abuses can be dealt with by regulation in a way which still leaves the partial bid as a commercial alternative. It also seems to me that it is an alternative worth preserving in the operation of the market for corporate control.