CODEWORD

The Panel has recently received queries about circumstances in which it might grant an exemption from the requirement for an independent adviser’s report under rule 22 of the Code.

A rule 22 report must be contained in or accompany an offer:

• if the target company has more than one class of voting securities; or
• if non-voting securities are included in the offer.

The independent adviser must certify in the report that, in its opinion, the consideration offered is fair and reasonable as between different classes. Once the independent adviser has given this certification the offer is deemed to comply with rule 8(3), 8(4) or 9(4), whichever is applicable.

The purpose of rule 22 is to:

• advise shareholders that the price offered for the securities held by them is fair and reasonable compared with the amount offered to holders of securities of a different class; and
• avoid a legal challenge to a takeover on the grounds that the consideration offered for different classes of security is not fair and reasonable as between the classes.

Consistent with the underlying purpose of rule 22, the Panel would only be likely to grant an exemption from the requirement for a rule 22 report if it is satisfied that in the particular circumstances of the relevant Code company there is, in effect, only one class of voting securities under offer.

These circumstances were demonstrated by St Laurence Property & Finance Limited in its offers for parcels of shares and mortgage bonds in Capital Office Fund Limited and Mt Wellington Industrial Fund Limited.

The offers related to two classes of securities, one voting and one non-voting, which were “stapled” together. Without an exemption St Laurence would have had to obtain a rule 22 report on the fairness of the considerations offered as between these two classes. However, the shares and bonds had been issued by each of the Code companies in parcels which could not be separated. The shares and bonds could not be traded separately, and the consideration offered by St Laurence related to each parcel and did not distinguish between the components of the parcel. To have done so would have been artificial.

The Panel considered that because the parcels of shares and bonds were inseparable there was effectively only one class of security holder i.e. holders of parcels of shares and mortgage bonds. No shareholder would, in effect, hold a different class of securities from other shareholders. Also, because security holders could not sell only their shares or only their bonds, the shares and bonds did not have a value independent of the parcel of which they were part.

In these circumstances the Panel considered that a rule 22 report on fairness between the shares and the bonds would have no meaning, and that an exemption from rule 22 was appropriate.

However, the Panel is unlikely to consider that there is, in effect, only one class of voting securities merely because two different classes of securities that are quite similar in nature, with only minor differences, are regarded by the market (based on price) as being virtually the same.

If the Panel were to grant an exemption from rule 22 in these circumstances it would, in effect, be certifying that the differences between the classes of security had no effect on the value of the securities. The Panel is not in a position to do this.

Even in circumstances where the securities are substantially similar a rule 22 report gives useful information for shareholders. For example, in the recent offer by Rubicon Forests Limited for Tenon Limited, Tenon had two types of share on issue, ordinary shares and preference shares. Both classes of share carried identical voting rights but one class had a temporary preferential status upon liquidation. Although the two classes of shares had recently traded at the same price, it was not certain that this would always be the case. The rule 22 report told shareholders that, in the opinion of the independent adviser, the (identical) consideration offered by Rubicon for each type of share was fair and reasonable as between the two classes of shares.

Another circumstance would be where identical securities were on issue, but some were held by employee shareholders subject to loan obligations back to the company, or on a partly paid-up basis. A rule 22 report is likely to be required in such circumstances.

Offerors considering applying for an exemption from rule 22 should first consider whether the Panel would be likely to be satisfied that, in respect of the relevant Code company:

• all shareholders hold the same rights; and
• there was no possibility that holders of different securities could get a different value for their securities, or be entitled to different treatment or be subject to different constraints on their ability to sell their securities.

In these circumstances the Panel would be likely to consider that there is, in effect, only one class of voting securities.