CODEWORD

The third issue of concern to the Panel relates to the content of reports about partial takeover offers.

The ability to make partial offers in a takeovers market regulated by a Code is unusual in a global context. Most regulated takeover markets do not allow for partial offers.

Under the New Zealand Code bidders have the ability to make offers which give them the minimum of legal control (i.e. a holding in excess of 50% of voting rights). They also have the ability, with the consent of the majority of the remaining shareholders (that is, those shareholders other than the bidder and its associates) to make an offer that would result in the offeror holding between 20% and 50% of the voting rights in the target company.

Partial offers – minimum legal control

A partial offer that allows a bidder to increase its holding to 50.01% could confer considerable benefits on that bidder. The independent adviser opining on the merits of the partial takeover needs to consider the impact on shareholders of these benefits as well as on the merits for the shareholders. They could include:

• the bidder will have legal control of the company for the minimum of outlay. In particular, any premium for control will only have to be paid to those shareholders who accept its offer and then only to the extent that their shares are acquired by the bidder. The Code’s scaling rules will impact on the take-up from each shareholder;
• the bidder will be put in a position where it is able to “creep” at the rate of 5 percentage points of control each year (after the first twelve months) without having to make an offer to all shareholders or require their consent for future acquisitions;
• there is probably much less likelihood of a successful takeover offer being made for the target company in future because of the controlling stake held by this bidder. Any future takeover offer that is made is likely to be on terms and with timing to suit the now majority shareholder;
• the acquiring of control by a new majority shareholder may well provide new direction and drive as well as stability and financial support for the company into the future. To provide appropriate comment in this area the adviser should try to ascertain the intentions of the offeror for the target company in the event that its partial offer succeeds. If the offeror will not provide this information the adviser should note its report accordingly.

The bidder making only a partial offer will be aware that, as the majority shareholder, it will have to take account of significant minority interests in all the decisions it makes and would not be assured of the ability to pass special resolutions.

Partial offers – less than legal control

Special considerations apply if the bidder is seeking to make an offer that would result in it holding between 20% and 50% of the voting rights in the target company. In such a case the offer document must be accompanied by a separate approval document which offerees should complete and return to the target company before the end of the offer period. In the case of a partial offer requiring shareholder approval the adviser will need to report to shareholders on both their right to vote for or against the partial offer and their ability to either accept or reject the partial offer. An independent adviser’s description of a partial offer as “fair”, on the basis of price, is particularly problematic because either relatively few shareholders will get the benefit of any premium paid by the bidder (because of a low number of acceptances) or, if there are a large number of accepting shareholders, the premium will be well spread. All continuing shareholders will experience the consequences of being minority shareholders in the ongoing company.

It is important that independent advisers give a balanced analysis of all aspects of partial offers to ensure target company shareholders are fully apprised of all the control and other issues. These issues may include the benefits that continuing shareholders will get from remaining in the company with a new controlling shareholder.

Where an offer is being made for 50% or less of the voting rights in the target company the quality of the adviser’s advice is particularly important because shareholders have two decisions to make.

It may be in shareholders’ best interests to both vote against a partial takeover because the bidder would achieve effective control of the target company while, at the same time, also to accept the offer. If the offer is approved and succeeds, the shareholder will at least sell some of his or her shares.

On the other hand, if a shareholder is comfortable with remaining a minority shareholder in a company effectively controlled by the bidder because of the benefits the shareholder considers the bidder will bring to the target company, then it may well decide to approve the partial takeover but not accept the offer.

 The guidance note has been amended to include additional suggestions for independent advisers in relation to their discussion of the merits of partial offers, including those for 50% or less of the target company’s voting rights.