CODEWORD

In August 2003 SK Foods International made a takeover offer for all the shares in Cedenco Foods Limited that it did not own. The takeover offer was successful and on 10 September 2003 SK Foods became the dominant owner of Cedenco.

Under rule 54 a dominant owner must issue an acquisition notice to all outstanding shareholders within 30 days of becoming dominant owner. SK Foods issued its acquisition notice the next day, 11 September 2003, while its takeover offer was still open.

In that notice SK Foods said that it would pay $2.30 for all outstanding shares in Cedenco (the same as its offer price) and informed shareholders that they had no right to object to the compulsory acquisition price. An issue arose for the Panel because SK Foods was not entitled to assert that outstanding Cedenco shareholders had no right to object to the compulsory acquisition price of $2.30.

SK Foods was relying on rules 56(1) and 56(2) of the Code. These require a person who becomes the dominant owner through acceptances of an offer to pay the same consideration for compulsory acquisition provided it has received acceptances for more than 50% of the shares that were the subject of the offer.

In these circumstances the outstanding shareholders have no right to object to the acquisition price and the offeror has no choice as to the consideration it will pay.

If, however, an offeror achieves dominant ownership otherwise than under an offer, or where it has not received acceptances for more than 50% of the shares that were the subject of an offer, then it must pay consideration that has been certified as fair and reasonable by an independent adviser. In such a case the outstanding shareholders have the right to object to that price. If sufficient shareholders object then the matter must go to expert determination by an expert appointed by the Panel.

SK Foods had 59.1% of the voting rights in Cedenco when it made its offer. This meant that approximately 41% of the voting rights in the company were the subject of the offer.

To be able to rely on, and be bound by, rule 56(2), SK Foods would have had to have received acceptances from holders of approximately 21% of the outstanding shares in Cedenco, when it issued its acquisition notice. It had not done so.

Using rule 36 of the Code SK Foods obtained 2.71 million shares, or 17.6% of Cedenco’s total voting rights, outside of the offer. The shares it had acquired under the offer amounted to some 2.13 million, or 13.8% of Cedenco’s total voting rights.

(Note: Rule 36 enables an offeror, during the course of an offer, where it has made a full offer for cash or including a cash alternative and the offer is unconditional, to obtain shares outside of the offer for cash. Typically these acquisitions will be on-market purchases for cash, but that was not the case with SK Foods which purchased shares by private treaty. If the consideration for any of these purchases is greater than the amount being offered in the offer then this is deemed to be a variation to the offer. While the offeror is able to make such purchases under rule 36, they do not count towards the requirement under rule 52(2) that acceptances be received for more than 50% of the shares the subject of the offer.)

On the Panel’s analysis SK Foods was some 1.02 million shares short of the acceptances needed to reach the 50% acceptance level when it issued its acquisition notice, and was still short of the required number when its offer closed on 15 September 2003.

SK Foods applied to the Panel for a retrospective exemption under section 45 of the Act. The exemption allowed SK Foods’ flawed compulsory acquisition procedure to go ahead as planned but provided for the price to go to expert determination if sufficient shareholders objected. The exemption was structured so as to give effect to the requirements of the Code’s compulsory acquisition provisions.

Significant features of the exemption granted by the Panel were:

• all shareholders whose acceptances had been received by SK Foods after it had issued its compulsory acquisition notice (because they may have been coerced into accepting the offer by SK Foods’ acquisition notice), and all shareholders who had not accepted SK Foods’ offer when it closed, could object to the compulsory acquisition price of $2.30 per share;
• if 10% of these shareholders objected to the price then the amount of consideration to be paid would go to expert determination;
• if the expert determined that the consideration should be higher than $2.30 then all shareholders who had accepted the offer and who had objected to the acquisition price, and all shareholders who had not accepted the offer when it had closed, would receive the higher amount; and
• if the expert determined that consideration should be less than $2.30 then all those shareholders who had accepted the offer and objected to the price, and all those shareholders who had not accepted the offer when it closed, whether or not they had objected to the price, could have been required to repay any overpayment they had received, to SK Foods. (This is consistent with rule 62(2) of the Code.)

In the event, less than 10% of the shareholders objected to the price and the expert determination process was not triggered.

This exemption highlights:

• if offerors wish to use the offer price as the compulsory acquisition price they need to monitor the extent to which they acquire securities outside of the offer during the offer period;
• the effectiveness of the Panel’s ability to grant retrospective exemptions. SK Foods was able to validly proceed with its compulsory acquisition while providing rights of objection to shareholders who had not accepted the offer or who may have been influenced by SK Foods’ acquisition notice to accept the offer. If the Panel had not been able to grant a retrospective exemption SK Foods’ flawed compulsory acquisition process could have become mired in legal challenge.