CODEWORD

Eldercare New Zealand Limited (2002/201)

ElderCare New Zealand Limited had put a recapitalisation plan to a shareholders’ meeting for approval in October 2001. The plan included the issue of convertible notes by ElderCare to Cullen Investments Limited. The plan was approved at the shareholders’ meeting.

As we have previously noted in our comment on exemptions in CodeWord 5, the Code does not affect the issuing of convertible notes as convertible notes themselves do not carry voting rights. However, when such notes are converted, voting rights are created. Increases in the holding or controlling of voting rights are subject to rule 6 of the Code and the exceptions contained in rule 7.

ElderCare and Cullen sought to obtain shareholder approval under rule 7(d) of the Code to enable Cullen to convert the notes. Rule 16 required ElderCare to state, in the shareholders’ notice of meeting, the specific percentage of voting rights to be allotted to Cullen on the conversion of the notes and the specific percentage of voting rights in ElderCare that Cullen would hold after the allotment. ElderCare could not state these percentages because they depended on the number of notes that will be converted which in turn will depend on the price of ElderCare’s shares at the time the notes are converted.

ElderCare did not apply for an exemption prior to the shareholders’ meeting. The company did not appreciate that an exemption was required. The Panel granted a retrospective exemption to ElderCare from rule 16(b) and (d) in respect of the requirements for the notice of meeting and Cullen was exempted from rule 7(d) to the extent that it required compliance with rule 16(b) and (d).

The exemption was granted subject to the condition that there is no change in the effective control of Cullen between 15 October 2001 and the date of the allotment of any voting securities arising from the conversion of the notes.

The Panel considered that the exemption was appropriate because:

• the issuing of convertible securities is an accepted means of raising equity capital in New Zealand and the Panel should facilitate these arrangements by exemption; and
• the exemptions are limited to those securities acquired by Cullen as a result of conversion of the notes, the allotment of which was approved by the non-associated shareholders of ElderCare at the meeting of ElderCare held on 31 October 2001; and
• although the information was incomplete in some respects, the shareholders in ElderCare were nonetheless given sufficient information to enable them to understand the potential impact of the issue of the notes on the voting control of the company.

The Panel considered that the exemption was consistent with the objectives of the Code because:

• ElderCare shareholders not associated with Cullen had the opportunity to vote on the issue of notes and future allotment of voting securities; and
• before the issue of notes Cullen controlled over 50% of the voting rights of ElderCare and accordingly already had control of the company; and
• while ElderCare did not comply strictly with all the requirements of the Code, it did, in substance, provide shareholders with the information required by the Code.

IT Capital Limited No.1 (2002/204)

IT Capital Limited was entering into a management service contract with Platinum Management Limited. The contract provided for the issue of options to Platinum Management Limited. As with the ElderCare exemption IT Capital could not comply with rule 16 because it did not know how many options Platinum would exercise.

IT Capital was exempted from complying with rule 16(b) and (d) in respect of the notice of meeting. Platinum was also exempted from rule 7(d) to the extent that it required compliance with rule 16(b) and (d).

The exemptions were subject to the conditions that:

(a) certain resolutions were passed at the meeting by the shareholders of IT Capital who were entitled to vote on those resolutions (whether voting in person or by proxy); and

(b) the notice of meeting contains particulars of the voting securities in IT Capital to be allotted on the exercise of the options, including –

• the maximum number of voting securities in IT Capital that could be allotted to Platinum on the exercise of all of the options;
• the percentage of the aggregate of all existing securities in IT Capital (including the voting securities allotted under certain resolutions included in the notice of meeting) and the maximum number of voting securities that could be allotted to Platinum on the exercise of all of the options that that maximum number represents;
• the maximum percentage of all voting securities in IT Capital that could be held or controlled by Platinum and any of Platinum’s associates (including the voting securities allotted under certain resolutions included in the notice of meeting) after completion of the allotment of that maximum number of voting securities; and

(c) the information to be provided under paragraph was to be based on certain assumptions set out in the exemption; and

(d) there is no change in the effective control of Platinum between the date of the meeting and the last day for the exercise of any of the options; and

(e) none of the shares in IT Capital that are issued in accordance with certain resolutions contained in the notice of meeting are issued to Platinum or any of Platinum’s associates; and

(f) the notice of meeting contains a summary of the terms and conditions of this notice.

The Panel considered that an exemption was appropriate because:

• the issuing of share options is an accepted means in New Zealand of providing incentives to management or employees and the Panel should facilitate these arrangements by exemption; and
• the exemptions are limited to those securities acquired by Platinum as a result of its entitlement to options to be approved by the non-associated shareholders of IT Capital at the meeting of IT Capital; and
• if the shareholders of IT Capital approve the issue of the options and the future allotment of voting securities upon the exercise of the options, with the knowledge of the maximum possible percentage control of IT Capital that may be obtained by Platinum and its associates, then, by implication, they can be taken to have also approved any lesser percentage of control that may be obtained following the actual exercise of the options and the associated allotment of voting securities.

The exemption is consistent with the objectives of the Code because IT Capital shareholders not associated with Platinum will have an opportunity to vote on the issue of the options and the future potential allotment of voting securities to Platinum.

IT Capital Limited No.2 (2002/281)

On 23 July 2002, IT Capital held a meeting of shareholders to consider a number of resolutions, including to:

(a) authorise and approve the issue and allotment by IT Capital of 15,000,000 fully paid ordinary shares in IT Capital to Mr McKee Wright and Mr Bryham; 

(b) authorise and approve the acquisition by IT Capital of the following shareholding interests currently held by Mr McKee Wright and Mr Bryham and to approve the issue and allotment of 137,500,000 ordinary shares in IT Capital for the acquisitions of:

(i) 40% of the share capital of Datasquirt Limited;

(ii) 50% of the share capital of Conceptual Solutionz Limited; and

(iii) 70% of the share capital of Sealegs International Limited.

This shareholders’ meeting was the subject of the earlier Code exemption outlined above.

At the IT Capital shareholders’ meeting certain amendments to the original resolutions were moved and passed and subsequently there was adverse media comment in respect of the transactions. As a result, Mr McKee Wright and Mr Bryham decided to subscribe for a total of 12,500,000 shares (rather than 15,000,000) and IT Capital’s board decided not to pursue the acquisition of Datasquirt so the number of shares being issued and allotted to Mr McKee Wright and Mr Bryham would be consideration for the acquisition of their interests in Sealegs and Conceptual only and would be reduced from 137,500,000 shares to 87,500,000 shares.

As the notice of meeting had specified a greater number of IT Capital shares being acquired by Mr McKee Wright and Mr Bryham and had included shares being allotted to Mr McKee Wright and Mr Bryham as consideration for the acquisition of shares in Datasquirt, the company was in the position of wanting to allot shares on the basis of a notice that did not contain the exact information required by rule 16(b).

IT Capital had to allot the shares by 6 August 2002 in order to comply with the Listing Rules. It was faced with either having to call a further meeting of shareholders to vote on the amended proposals or seek an exemption from rule 6(1) of the Code to allow the allotment to proceed without a further meeting being called.

The Panel granted an exemption to Mr McKee Wright and Mr Bryham from rule 6(1) of the Code in respect of an increase in their voting control in IT Capital arising from the amended allotments described above. The exemption applied to acts occurring on or after 2 August 2002 and expired on 30 September 2002.

The Panel considered that it was appropriate to grant the exemption because IT Capital’s shareholders had recently approved, by a substantial majority, with the benefit of an independent adviser’s report, a proposal for a greater increase in the percentage of voting rights to be held by Mr McKee Wright and Mr Bryham than would arise as a result of the proposed allotments. By implication, the shareholders could be taken to have also approved that Mr McKee Wright and Mr Bryham may increase their percentage of voting rights by a lesser amount.

The Panel considered that the exemption was consistent with the objectives of the Code because:

(a) the cost to the company and its shareholders of requiring compliance with the Code, which would involve the convening of a further meeting of the company and a revised independent adviser’s report, would be out of proportion with the benefits resulting from such compliance; and

(b) IT Capital shareholders had already been given an opportunity to decide the merits of a proposal for a greater increase in the percentage of voting rights held by Mr McKee Wright and Mr Bryham.

AFFCO Holdings Limited (2002/242)

AFFCO Holdings Limited required shareholder approval under rule 7(d) of the Code to make a renounceable pro rata rights issue to its shareholders. It was intended that the issue would be underwritten by Talley’s Fisheries Limited and Toocooya Nominees Limited. Talley’s held 19.9% of AFFCO’s voting rights. Toocooya held 18.7% of AFFCO’s voting rights.

Shareholder approval under rule 7(d) was necessary as it was likely that Talley’s and Toocooya would each, in their capacity as underwriters, increase their voting rights in AFFCO above 20%. Talley’s and Toocooya also sought shareholder approval to acquire 75% and 25% respectively of Dairy Meats NZ Limited’s rights under the issue. Talley’s and Toocooya would further increase their voting rights in AFFCO on the exercise of those rights.

AFFCO could not comply with rule 16 of the Code because it did not know:

• the precise number of shares that would be allotted to each of Talley’s and Toocooya; and
• the exact percentage of AFFCO’s voting rights that would be held or controlled by each of Talley’s and Toocooya after the allotment; and
• the total number of shares that will be on issue following the allotment.

In addition there was a difficulty for Talley’s and Toocooya under rule 6(2)(a) of the Takeovers Code. Rule 6(2)(a) provides that if a person and any other person or persons acting jointly or in concert together become the holders or controllers of voting rights, then that person is deemed to have become the holder or controller of those voting rights for the purposes of rule 6(1).

AFFCO was exempted from complying with rule 16(b) in respect of the notice of meeting. Talley’s and Toocooya were each exempted from rule 7(d) to the extent that it required compliance with rule 16(b).

The Panel also granted an exemption to Talley’s and Toocooya from rule 6(1) of the Code, to the extent that rule 6(2)(a) might deem them to be the holders or controllers of all the voting rights acquired by the other, in respect of any increase or deemed increase in their control of voting rights in AFFCO:

(a) arising from the allotment of voting securities on the conversion of rights offered to them under the issue; or

(b) by underwriting the shortfall under the agreement; or

(c) arising from the Dairy Meats transaction and the consequent allotment of voting securities to them by AFFCO on the conversion of those rights.

The exemptions were granted subject to the conditions that:

(a)  the notice of meeting contains particulars of the voting securities that may be allotted to Talley’s and Toocooya respectively, including

(i) the maximum number of voting securities in AFFCO that could be allotted to each of Talley’s and Toocooya both under, or in terms of, the conversion to voting securities of the rights acquired under the issue or the underwriting agreements; and

(ii) the percentage of the aggregate of all existing voting securities in AFFCO and all voting securities in AFFCO that could be allotted under the conversion to voting securities of the rights acquired under the issue that each of the maximum number of voting securities that would be allotted to Talley’s and Toocooya represents; and

(iii) the maximum percentage of all voting securities in AFFCO that could be held or controlled by each of Talley’s and Toocooya after completion of the allotment of the maximum number of voting securities that could be allotted to each of them; and

(b) the notice of meeting contains a statement of the consideration payable for the Dairy Meats transaction and when that consideration is payable; and

(c) Talley’s and Toocooya’s maximum control percentages immediately following the allotments do not exceed 35% and 25% respectively; and

(d) Talley’s and Toocooya do not acquire any rights under the issue other than to the extent acquired

(i) under their respective pro rata entitlements in the issue; and

(ii) as underwriters of the issue; and

(iii) under the Dairy Meats transaction; and

(e) Talley’s and Toocooya are not associates of each other for the purposes of the Code immediately following the allotment of voting securities on exercise of the rights obtained under the issue, the agreements, or the Dairy Meats transaction; and

(f)    the notice of meeting contains a summary of the terms and conditions of the exemptions granted in this notice.

The Panel considered that an exemption was appropriate because:

• shareholder underwriting agreements are an accepted means of raising equity capital in New Zealand and the Takeovers Panel should facilitate these arrangements by exemption; and
• if the shareholders in AFFCO approve the maximum possible increase in the percentage of voting rights held by each of Talley’s and Toocooya as a result of an allotment by AFFCO being achieved through mechanisms that are consistent with the provisions of the Code, then, by implication, they can be taken to have also approved any lesser percentage of control that may be obtained by each of Talley’s and Toocooya through these mechanisms following the allotments; and
• the exemption sought is limited to the new ordinary shares issued to Talley’s and Toocooya by AFFCO. This arises from their respective entitlements under the issue and under the underwriting agreements and/or the Dairy Meats transaction, the allotment of which will have been approved by nonassociated shareholders to a maximum level; and
• rule 6(2)(a) of the Code is an anti-avoidance measure. In this instance, the fundamental rule is not being avoided because non-associated shareholders will have the opportunity to approve the allotment of securities to Talley’s and Toocooya under rule 7(d) of the Code.

The exemption is consistent with the objectives of the Code because the non-associated shareholders of AFFCO will have an opportunity to vote on the potential allotments of voting securities.

Designer Textiles (NZ) Limited (2002/250)

There are two elements to this exemption. One relates to a notice of meeting under rule 7(c) of the Code and the other relates to an increase in voting rights as a result of a buyback. These are explained separately below.

Acquisition of shares in Designer Textiles Limited by Gould Holdings Limited

The Avonbank Trust, the Belvoir Trust (together “the Trusts”), which were ultimately controlled by Mr George Gould, together controlled 24.69% of the ordinary shares of Designer Textiles (NZ) Limited. The Trusts proposed to sell their Designer Textiles shares to Gould Holdings Limited, also ultimately controlled by Mr George Gould.

The acquisition of 24.69% of the voting securities of a Code company would be a breach of the fundamental rule unless one of the exceptions in rule 7 was utilised. The Trusts requested that Designer Textiles seek approval for the acquisition by Gould Holdings under rule 7(c) of the Code and forward a notice of meeting to shareholders containing the information required by rule 15 of the Code. However, Designer Textiles was unable to include the information required by rule 15(b)(ii) and (iii) in the CODEWORD December 2002 6 notice with the required specificity because of a proposed buyback.

Rule 15(b) requires:

“particulars of the voting securities to be acquired, including

(i)    the number being acquired; and

(ii)   the percentage of all voting securities that that number represents; and

(iii)  the percentage of all voting securities that will be held or controlled by the person acquiring the voting securities after completion of the acquisition;”

In April 2002 the Board of Designer Textiles had resolved to make an on-market share buyback within a period of 12 months (commencing 8 April 2002) of up to 5% of the shares on issue. It was expected that Mr Gould’s trusts would not accept the buyback. The buyback would not be completed before the notice of meeting relating to the acquisition of Designer Textiles shares by Gould Holdings was to be sent to shareholders. Accordingly rule 15(b)(ii) and (iii) of the Code could not be complied with as the percentage of all Designer Textiles voting securities that the number being acquired represented could not be stated with certainty.

The Panel granted an exemption to Designer Textiles from rule 15(b) of the Code in respect of the contents of the notice of meeting and for Gould Holdings from rule 7(c) to the extent that rule 7(c) requires the notice of meeting to be in accordance with rule 15(b). The exemption was granted subject to the condition that:

(a) the notice of meeting required by rule 15 of the Code must state particulars of the voting securities to be acquired by Gould Holdings from the Trusts, including

(i) the number being acquired; and

(ii) the maximum possible percentage of all voting rights that the shares being acquired by Gould Holdings from the Trusts would represent after the completion of the buyback (on the basis that the buyback is fully implemented);

(iii) the maximum possible percentage of all voting rights that will be held or controlled by Gould Holdings after the completion of the acquisition and the buyback (on the basis that the buyback is fully implemented); and

(b) there is no change in the control of Gould Holdings between the date of the meeting and the date of the completion of the acquisition and the buyback.

The Panel considered that it was appropriate to grant the exemption, because:

(a) it was impossible for the actual percentage figures to be stated at the time the notice was sent to shareholders; and

(b) if the shareholders in Designer Textiles approved the maximum possible percentage of voting rights that may be acquired by Gould Holdings from the Trusts, then by implication, they can be taken to have also approved the acquisition of a lesser percentage of voting rights by Gould Holdings from the Trusts.

The Panel considered that the exemption was consistent with the objectives of the Code because the non-associated shareholders of Designer Textiles would have an opportunity to vote on:

• the immediate and potential increase of the voting rights of the Trusts and Gould Holdings as a result of the buyback; and
• the potential acquisition of voting rights by Gould Holdings from the Trusts.

The buyback of shares in Designer Textiles Limited

In most circumstances an increase in voting control resulting from a share buyback would be covered by the exemptions in clauses 4 or 5 of the Takeovers Code (Class Exemptions) Notice 2001. This is the Panel’s preferred option for dealing with buybacks and involves least cost for the Code companies concerned. Designer Textiles and Gould Holdings chose not to avail themselves of the available class exemptions.

Gould Holdings indicated that if any buyback offers were made after it acquired Designer Textiles shares it would not be accepting any such offer(s) and would not wish to decrease its shareholding percentage to pre-buyback levels in the event that other shareholders accepted the buyback offer. The Trusts also indicated that, should they not already have sold their Designer Textiles shares to Gould Holdings, they would not be participating in the buyback and would not wish to decrease their shareholding percentage to pre-buyback levels.

The Panel decided to grant an exemption to Gould Holdings and the Trusts from rule 6(1)(b) subject to the condition that all matters that would be required to be satisfied for a rule 7(c) exception are met (with references to “acquisition” being replaced by references to “an increase in voting control by reason of the buyback”). However, as the number of shares that would actually be acquired by Designer Textiles under the buyback was not known, the notice of meeting could not state the information required by rule 15(b)(ii) and (iii). Accordingly the notice of meeting would instead state the maximum possible increase in the percentage of voting rights held by the Trusts and/or Gould Holdings (depending on when the buyback was undertaken). The exemption differed from the class exemptions in that the shareholders were being asked to expressly approve the increase in voting control by Gould Holdings or the Trusts rather than the buyback which would result in that increase in voting control.

The exemption was also subject to the conditions that:

• there is no change in the control of Gould Holdings or the Trusts between the date of the meeting and the date of the completion of the buyback; and
• the Trusts, Gould Holdings, and their associates could not vote on the proposed resolution in respect of the increase in the percentage of Gould Holdingsí and the Trustsí voting rights in Designer Textiles arising from the buyback.

The Panel considered that it was appropriate to grant the exemption because:

• although a buyback is an accepted method of reducing capital, a buyback is not able to be excepted from the fundamental rule under rule 7(c) of the Code as the increase in voting control is not due to an acquisition. Accordingly, an exemption from rule 6(1) of the Code is necessary. However, the exemption is subject to the condition that all the matters that are required to be satisfied for a rule 7(c) exception must be met; and
• if the shareholders of Designer Textiles approve the maximum possible increase in the percentage of Gould Holdingsí and the Trusts’ voting rights in Designer Textiles, then it can be taken, by implication, that those shareholders have approved that Gould Holdings and/or the Trusts may increase the percentage of their voting rights by a lesser amount.

The Panel considered that the exemption was consistent with the objectives of the Code because the non-associated shareholders of Designer Textiles would have an opportunity to vote on:

• the immediate and potential increase of voting rights of the Trusts and Gould Holdings as a result of the buyback; and
• the potential acquisition of voting rights by Gould Holdings from the Trusts.