CODEWORD

In February 2014, the Panel granted an exemption that enabled SFL Holdings Limited (a subsidiary of Shanghai Pengxin Group Co Limited) to extend the final date by which a statutory approval condition in its takeover offer for shares in Synlait Farms Limited had to be satisfied.^[1] It is rare that the Panel grants an exemption from the Code’s timing rules and this note explains the Panel’s reasons for its decision to grant the exemption.

The context for the Panel’s decision

The Panel has the power under section 45 of the Takeovers Act 1993 to grant exemptions from compliance with the Code. The Code is broad in its effect and in some cases can have unintended consequences or may not adequately provide for unusual circumstances.

The Panel’s exemption power is not intended to facilitate a transaction structure that does not comply with the Code, or to achieve a particular commercial outcome or benefit. The Panel, in deciding whether an exemption is appropriate, considers whether compliance with the Code is possible and whether compliance would create an inappropriate, unreasonable or unintended result.

Further, the Takeovers Act requires that the Panel’s reasons for granting an exemption must be stated and include (a) why it is appropriate that the exemption is granted, and (b) how the exemption is consistent with the objectives of the Code.

In the Synlait Farms situation, the Panel considered the policy in rules 25(3A) and 25(4) of the Code. These rules provide that conditions of an offer must be satisfied by a specified date that must not be later than 14 days, or, if the acquisition requires statutory approval, 30 days, after the end of the offer period. If an offer is not unconditional by the specified date, then the offer lapses. The Panel also considered the policy of rule 24B, which allows an offer period to be extended for up to 60 days beyond the usual maximum offer period if the offer was subject to a minimum acceptance condition, and that condition is satisfied or waived before the end of the offer period.

The Panel noted that a takeover can draw heavily on a target company’s resources and that shareholders should not be unfairly constrained from disposing of their shares outside of a takeover offer. The timing rules balance the need to limit the period of a takeover offer with the need to allow shareholders sufficient time to make an informed decision about whether to accept or reject a takeover offer. Accordingly, the Panel does not consider lightly applications for exemptions from those timing rules.

Background on the Synlait Farms offer

On 1 November 2013, SFL Holdings made an offer to acquire all of the shares in Synlait Farms. The offer was for $2.10 per share and included a price escalation clause whereby offerees would be paid an additional $0.001957 per share for each day from 1 January 2014 until the day that the offer was declared unconditional.

The offer was subject, among other things, to:

(a) a minimum acceptance condition that SFL Holdings received sufficient acceptances that would confer on it 90% or more of the total voting rights;

(b) a condition that the offer was approved by the New Zealand Overseas Investment Office (OIO); and

(c) a condition that the offer was approved by the relevant regulatory authorities in China.^[2]

The offer was initially due to close on 6 December 2013. On 21 November, SFL Holdings extended the closing date until 20 December. The minimum acceptance condition was satisfied on 26 November. The offer was extended again on 19 December with a new closing date of 29 January 2014.

The date by which the offer had to be declared unconditional in respect of any statutory approvals (under rule 25(3A) of the Code) was 28 February 2014. If the offer was not declared unconditional by that date, it would lapse and SFL Holdings would not be able to take up any acceptances. In other words, the offer would fail.

The offer closed on 29 January with SFL Holdings receiving acceptances in respect of 99.58% of the shares.

The OIO gave its approval of the takeover on 31 January 2014, but by 17 February it became apparent that the Chinese regulatory approval of the offer was unlikely to be given before 28 February. This would mean that the relevant condition would not be satisfied by the specified date for going unconditional, and the offer would fail. An urgent exemption was sought by SFL Holdings from rule 25(3A) to enable an extension of 30 days for the condition deadline.

Panel’s decision

The Panel met to consider the exemption application on 24 February 2014 and ultimately approved the granting of an exemption for SFL Holdings from rules 25(3A) and 25(4) of the Code to extend the deadline for going unconditional by 30 days.

The Panel concluded that the granting of the exemption was appropriate because of the particular facts of the takeover, including:

(a) the offer received an acceptance level of 99.58% by the time it closed, with a more than 90% acceptance level within the first 30 days of the offer;

(b) the Panel was advised by SFL Holdings that the extension would be sufficient time to satisfy the Chinese regulatory condition;

(c) the granting of the exemption was supported by the independent directors of the target company;

(d) the price offered under the offer was above the valuation range given in the independent adviser’s report;

(e) the offer was not hostile and there were no competing offers;

(f) a price escalation clause was included in the offer and, because of the price escalation clause, there was unlikely to be any prejudice to Synlait Farms’ shareholders as a result of an extension of up to 30 days to the deadline for going unconditional; and

(g) provided the offer became unconditional, it would be subject to the Code’s compulsory acquisition rules.

The Panel decided that the granting of the exemption was consistent with the objectives of the Code because:

(a) the Code recognised that obtaining regulatory approvals could take longer than the takeover offer period and allowed for this in rule 25(3A);

(b) although the Code stipulated a maximum offer period of 90 days, it also provided flexibility to offerors whose full offers were subject to a minimum acceptance condition by allowing up to an additional 60 days for the offer period under rule 24B, if that minimum acceptance condition had been satisfied or waived before the end of the offer period;

(c) the additional time period in rule 24B, which applies from the day on which the minimum acceptance condition was satisfied or waived, would have been available to the offeror but for the satisfaction of the offer’s 90% acceptance condition early in the offer period; and

(d) the benefit to Synlait Farms’ shareholders in granting an exemption, which kept the takeover viable in the circumstances of the offer, outweighed the benefit of strict compliance with the Code.

Concluding remarks

The Panel considers the timeframes set out in the Code provide a critical balance between ensuring takeover transactions do not drag out to the detriment of target companies and their shareholders and providing sufficient time to allow shareholders to make an informed decision about whether to accept a takeover offer. The Panel does not consider lightly applications for exemptions from those timing rules. However, from time to time circumstances arise that could mean that strict compliance with the timing rules could result in an inappropriate or unreasonable outcome, and an exemption may be granted.