CODEWORD

Underwriting is an established feature of capital market activity in New Zealand which the Panel believes it should facilitate by appropriate exemption.

The difficulty is that when a professional underwriter agrees to underwrite a share or rights issue the outcome in Code terms is not known. The underwriter may or may not obtain more than 20% of the voting control of the Code company. The intention of the professional underwriters class exemption is to allow the underwriter to support the issue, but if it acquires over 20% of the voting rights in the Code company it must sell down its holding within six months and cannot vote its additional shares in the meantime.

The Panel originally granted a class exemption for professional underwriters in clause 19 of the Takeovers Code (Class Exemptions) Notice (No.2) 2001. That has now been replaced with a new exemption.

The Panel replaced the previous class exemption for underwriters because it considered it did not adequately address the risk that corporate investors and their associates may use an underwriting commitment for the purpose of increasing their control in a Code company.

The Panel sought public comment on the proposed form of the exemption but received very few submissions. However, most of the submissions received supported the replacement exemption.

The Takeovers Code (Professional Underwriters) Exemption Notice 2004 was notified in the New Zealand Gazette on 27 May 2004 and applied from that date.

The Professional Underwriters Exemption Notice exempts professional underwriters from the fundamental rule in respect of any increase in their percentage of voting rights resulting from fulfilling their obligations under a bona fide underwriting arrangement. Like the previous class exemption it is subject to the conditions that:

• any increase in voting control above 20% is eliminated within 6 months; and
• the additional voting rights are not exercised before that elimination.
• However, under the conditions of the new notice the exemption will apply only if:
• the purpose of the underwriter’s entry into the underwriting or sub-underwriting contract was to earn fees, commission or similar remuneration; and
• neither the underwriter nor any upstream party of the underwriter had a collateral purpose or intent, in entering into the underwriting or sub-underwriting contract, of enabling any person to increase their voting control; and
• immediately before the underwriter’s entry into the underwriting or sub-underwriting contract, the aggregate of the control percentages of the person and the person’s associates did not exceed 5%.

Where a Code company is making a rights issue to existing shareholders and the underwriter would not satisfy the conditions of the Professional Underwriters Exemption Notice, the underwriter will not be able to increase its control of voting rights in the Code company above the 20% level unless it is able to obtain a specific exemption from the Panel.