CODEWORD

In March 2003 TrustPower Limited (TrustPower), an electricity generating and retail company based in Tauranga, made a pro-rata buyback offer to purchase 2 shares of every 7 held by each shareholder.

In making this offer TrustPower sought to rely on clause 4 of the Takeovers Code (Class Exemptions) Notice (No 2) 2001 (the buyback exemption)). This exemption provides a means for shareholders to retain increases of voting control where a company acquires shares through a buyback that has been approved by the shareholders.

Buyback procedure

The process that TrustPower sought to follow for its buyback was:

• distribute the offer document requiring irrevocable responses from all shareholders;
• after the offer closed, prepare a notice of meeting setting out the exact increased control percentages requiring approval of the non-associated shareholders and send it, with an independent adviser’s report, to shareholders;
• hold the meeting of the company at which shareholders would vote to approve the increased control percentages arising from the buyback.

The Panel considered that this procedure did not comply with the buyback exemption. The buyback proposal, and the resulting potential increases in control percentage for each major shareholder, should have been put to shareholders with the independent adviser’s report at a meeting held before the offer was made.

The procedure followed by TrustPower meant that shareholders were required to irrevocably commit to the buyback offer without having any advice on the merits of the buyback, including its control implications.

The terms of the buyback exemption are designed to ensure that shareholders receive advice on the merits of the buyback, including its control implications, before they are required to decide whether or not to accept the offer

The Panel convened a meeting under section 32 to determine the application of the buyback class exemption. Representatives and counsel for TrustPower’s four major shareholders and TrustPower attended the meeting.

The Panel determined that the procedure for the buyback used by TrustPower did not comply with the terms of the buyback exemption. However, the buyback offer was underway and had already been accepted by many shareholders. The Panel’s determination indicated that it would consider an exemption for TrustPower and the major shareholders intending to increase their voting control in TrustPower.

The full text of the Panel’s determination can be seen on the Panel’s website.

The exemption

TrustPower applied for an exemption. The Panel granted an exemption to allow the buyback to proceed but give shareholders who had accepted the buyback the opportunity to withdraw acceptances. This ensured that shareholders would have the benefit of the independent adviser’s report and the information in the notice of meeting before they made their final decision as to whether to accept the buyback offer.

The exemption from rule 6(1) of the Code in respect of any increase in the voting rights they would hold or control in TrustPower as a result of the buyback was granted to TrustPower’s four major shareholders, Alliant International New Zealand Limited (Alliant), Infratil Limited (Infratil), The Australian Gaslight Company (AGL) and the Tauranga Energy Consumer Trust (TECT). AGL was included in the exemption even though it transpired that AGL sold out its entire holding in TrustPower as a result of the buyback.

The exemption was subject to conditions including:

• that shareholders of TrustPower had to approve the potential increase by separate resolution in respect of each of Alliant, Infratil, AGL and TECT;
• that neither the shareholder whose voting control was to increase nor any of its associates could vote in respect of that shareholder’s potential increase in voting rights;
• that, as mentioned above, any shareholder who had accepted TrustPower’s buyback offer (other than any of the four beneficiaries of the exemption) would have up until 5 working days after the date of the shareholders’ meeting to rescind their acceptances without penalty; and
• that for a short period after the meeting TrustPower would assist any shareholders who had previously rejected the offer to sell their TrustPower shares.

Other conditions related to the contents of the notice of meeting.

The exemption was granted because this was the first case where the application of the buyback exemption had come before the Panel and the Panel was satisfied that TrustPower had acted in good faith and on the basis of legal advice in the approach that it had taken.

The full text of the exemption is published on the Panel’s website.

Associates

 A further issue arose concerning the eligibility of the major shareholders to vote in favour of the resolutions approving the increases in voting control.

TrustPower’s major shareholders at 31 March 2003 were:

• Infratil, 27.93%
• Alliant, 18.87%
• TECT, 22.67%
• AGL, 20.47%

Infratil and Alliant were parties to an investment agreement making them “associates” for the purposes of the Code. However the Panel was concerned, on the basis of the evidence, that all four major shareholders may have been associated with each other and with TrustPower in respect of the increased voting control being sought by TECT, Infratil and Alliant.

The four major shareholders offered to give the Panel enforceable undertakings under section 31T of the Act that they would not exercise their voting rights at TrustPower’s meeting. The Panel accepted these undertakings as an efficient way to deal with its concerns while allowing the buyback transaction to proceed in accordance with its contractual timetable.

Future buyback offers

This was the first time the Panel had intervened in a buyback transaction carried out under the buyback class exemption. The Panel’s determination settled the procedure for buyback offers involving shareholder approval under the buyback class exemption. The shareholder meeting to approve the potential increases in voting control must be held before the buyback offer is made to shareholders. Shareholders who wish to increase their control percentages must disclose their intention before the meeting takes place. This enables the notice of meeting and the independent adviser’s report to be prepared on a proper basis.

The need for the type of exemption granted to TrustPower should not arise in the future.