Transactions

BEFORE THE TAKEOVERS PANEL

Background

[1]  Rubicon Limited ("Rubicon") is a New Zealand incorporated company listed on the New Zealand Stock Exchange. As such Rubicon is a code company for the purposes of the Takeovers Act 1993 (the "Act") and the Takeovers Code (the "Code").

[2]  On 28 August 2002 GPG Forests Limited ("GPG Forests") a wholly-owned subsidiary of Guinness Peat Group plc ("GPG") of the United Kingdom, gave notice to Rubicon under rule 41 of the Code of its intention to make a partial takeover offer for Rubicon in respect of shares GPG does not already hold in Rubicon. The Panel received a copy of this notice at approximately 3.30 p.m. on Wednesday 28 August 2002.

[3] At the date of the offer GPG held or controlled some 57,797,224 (19.997%) of the voting securities of Rubicon.

[4] Another significant shareholder of Rubicon is Perry Corporation ("Perry") of the United States. The takeover notice given by GPG Forests discloses Perry as holding 44,596,569 (15.983%) of the voting securities of Rubicon. 36,000,000 of these shares were disclosed to the NZSE as having been acquired by Perry on 11 July 2002.

[5] The Panel routinely reviews takeover documents provided to it as required by the Code.

[6] On the afternoon of 28 August 2002 the Panel executive formed the preliminary view that the structure and form of GPG Forests' partial offer appeared to be at variance with the provisions of the Code. On the morning of 29 August 2002 the Chairman of the Panel agreed to call a meeting of the Panel to consider the takeover notice. The Panel met at 12.15 p.m. on that day. The Panel considered that there was doubt that the structure of the offer could comply with the Code. The Panel decided that the executive should write to the legal advisers for GPG Forests, Lowndes Jordan, Auckland, asking the advisers to explain the basis on which they considered the takeover notice complied with the Code. The Panel also asked the executive to contact Lowndes Jordan by telephone to alert them to the fact that the Panel would be seeking urgent comments from them on several compliance questions.

[7] The executive telephoned Lowndes Jordan at approximately 12.45 p.m. and the Panel's letter was subsequently dispatched to the firm at 2.50 p.m. The Panel sought Lowndes Jordan's responses to several questions by 9.00 a.m. on Friday 30 August 2002 and was scheduled to meet at noon on that day to consider these responses.

[8] The Panel appointed Mr Robert Dobson QC as counsel to assist it in the matter.

[9] At approximately 5.30 p.m. on Thursday 29 August 2002, and again at 8.40 p.m. that evening, Lowndes Jordan asked for an extension of time to 9.00 a.m. on Tuesday 3 September for responding to the Panel's enquiries. The Panel met at 12.30 p.m. on Friday 30 August and it was decided to give Lowndes Jordan a further opportunity, until 5.30 p.m. that afternoon, to provide responses to the Panel. The Panel was advised at 5.00 p.m. that no comments would be forthcoming by that time.

[10] At 7.30 p.m. in the evening of Thursday 29 August 2002 the Panel received a formal request from Perry, through its legal advisers Phillips Fox, Wellington, that the Panel make a determination under section 32 of the Act as to whether or not GPG's proposed offer would comply with the Code having regard to certain actions taken by GPG against Perry. Perry requested the Panel to make restraining orders against GPG.

[11] The Panel was advised that, following the disclosure of Perry's acquisition of shares on 11 July 2002, GPG filed proceedings in the High Court alleging breaches of the Securities Amendment Act 1988 by Perry in relation to those shares. As part of these proceedings GPG obtained an interim injunction from the High Court dated 28 August 2002 preventing Perry from disposing or agreeing to dispose of its full holding of 44.6 million shares of Rubicon, before the claims were determined. The injunction was granted with Perry's consent.

[12] The Panel met at 6.00 p.m. on Friday 30 August. It considered the material before it. The Panel also considered the request from Perry. The Panel decided to convene meetings on Thursday 5 September 2002 under section 32 of the Act to determine whether it should exercise its powers under the Act.

[13] The Panel received submissions from GPGForests and Perry on 4 September 2002. The Panel met in Auckland on 5 September 2002. GPG Forests appeared and was represented at the meeting. Perry chose not to appear but made further written submissions in response to GPG's submissions. Rubicon was invited to seek leave to appear, but declined to do so.

The first issue for determination

[14] The first issue to be determined by the Panel was whether GPG Forests' prospective partial offer for Rubicon, if made in the form of the takeover notice filed on 28 August 2002, would be in compliance with the Takeovers Code.

Nature of the proposed partial offer as contained in the takeover notice

[15] GPG's summary of its proposed offer describes it as being for:

EITHER

(a) 40% of the Outstanding Rubicon Shares; OR

(b) If:

• the offer is not accepted in respect of sufficient Outstanding Rubicon Shares to leave GPG holding over 50% of the total ordinary shares in Rubicon on issue; and
• approval is obtained from Rubicon shareholders in accordance with the requirements of the Takeovers Code, the percentage of the Outstanding Rubicon shares for which acceptances are received which would leave GPG holding between 30% and 50% of the total ordinary shares in Rubicon on issue.

[16] The effect of the notice would mean GPG Forests making an offer for 37.501964% of Rubicon's issued shares (40% of the shares not already held by GPG), called the "Unconditional Percentage", which if acquired would result in GPG Forests holding more than 50% of the voting rights in Rubicon (approximately 51.9985%); or

(a) If:

• GPG did not achieve sufficient acceptances in respect of 37.501964% of Rubicon's shares (to leave GPG holding over 50% of Rubicon's total shares) and
• approval was obtained from Rubicon's shareholders in accordance with rule 10(1)(b) of the Code,

then GPG would acquire a percentage between 37.501964% and 12.502749% of Rubicon's shares (called the "Fallback Percentage"), which would result in GPG holding between 30% and 50% of Rubicon's shares.

[17] In respect of the Fallback Percentage the summary of the offer states:

If the Offer is not accepted in respect of sufficient Outstanding Rubicon Shares to leave GPG holding over 50% of the total Rubicon shares on issue, the Offer will be for such lower percentage of the Outstanding Rubicon Shares which would leave GPG holding between 30% and 50% of the total Rubicon shares on issue.

[18] The terms of the offer mean that any acceptance of it commits the accepting shareholder, whether the outcome turns out to be in respect of the Unconditional Percentage or the Fallback Percentage.

[19] The takeover notice defines "Specified percentage" as:

The percentage of Outstanding Rubicon Shares to which this offer relates, as specified in [the terms quoted in paragraphs 15(a) and 15(b) above].

[20]  GPG's proposal affords to non-associated shareholders the opportunity, if they wish, to vote for or against GPG's acquisition of additional Rubicon shares in the range from 30% to 50%, in the event that GPG's offer to gain control of more than 50% of Rubicon's shares is unsuccessful. This involves the prospect of shareholders:

(a) Regardless of whether they have voted to approve or object to the making of the offer for a percentage below 50%, having to decide whether or not to accept GPG's offer before knowing the lesser percentage, if there is one, to which the partial offer relates;

(b) Finding themselves in the position where, having accepted the offer, but objecting to GPG making an offer for less than 50% of Rubicon's shares, they have no right to withdraw their acceptance in the event that approval is obtained to the lesser offer.

The relevant provisions of the Code

[21]  The relevant provisions of the Code include:

6. Fundamental rule

(1) Except as provided in rule 7, a person who holds or controls-

(a) No voting rights, or less than 20% of the voting rights, in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company unless, after that event, that person and that person's associates hold or control in total not more than 20% of the voting rights in the code company:…

[22]  The second exception provided in rule 7 states:

A person may become the holder or controller of an increased percentage of the voting rights in a code company-

(b) by an acquisition under a partial offer (the main provisions are contained in rules 9 to 14, Parts 4 to 6, and Schedules 1 and 2):

[23]  Rule 9(3) provides that: If there is only 1 class of voting securities of the target company, a partial offer must be made for a specified percentage of the voting securities of the target company not already held or controlled by the offeror.

[24]  Rule 10(1) of the Code provides that:

When offeror does not hold or control more than 50% of voting rights-

(1) If, on the date of a partial offer, the offeror does not hold or control more than 50% of the voting rights in the target company, the partial offer must be for voting securities that, when taken together with voting securities already held or controlled by the offeror, confer-

(a) more than 50% of the voting rights in the target company; or

(b) a lesser percentage of the voting rights in the target company if approval is obtained in accordance with the following provisions:

(i) the takeover notice and the offer must include a statement that approval is sought under rule 10 of the Takeovers Code and that the offer is conditional on approval being obtained:

(ii) the offer must be accompanied by a separate approval document providing for the offeree to approve or object to the offeror making an offer for the lesser percentage:

(iii) approval under this rule is obtained if the offerees so approving hold more voting rights in the target company than are held by offerees so objecting:

(iv) for the purposes of subparagraph (iii), voting rights held by the offeror and its associates must be disregarded:

(v) for an approval or objection to be valid for the purposes of this rule, the completed approval document must be received by the target company or its agent before the expiration of the offer period.

[25]  Rule 23(1) of the Code provides:

(1) If, on the date of the offer, the offeror does not hold or control more than 50% of the voting rights in the target company, the offer must be conditional on the offeror receiving acceptances in respect of voting securities that, when taken together with voting securities already held or controlled by the offeror, confer-

(a) more than 50% of the voting rights in the target company; or

(b) in the case of a partial offer, any lesser percentage approved under rule 10(1)(b)

(2) The offeror must not take up any equity securities under the offer unless the condition referred to in subclause (1) is satisfied by the end of the period.

Application of the relevant provisions of the Code to a partial offer

[26]  A partial offer is an exception to the fundamental rule. The Panel sees the Code applying to a potential partial offer as follows:

(a)  Under rule 9(3) any partial offer "must be made for a specified percentage of the voting securities not already held or controlled by the offeror." In common English usage "a specified percentage" is a singular term and means the offer must be for a single percentage figure of the shares not already held by the offeror.

(b)  The rule 9(3) requirement applies under rule 10(1)(a) so that there has to be a specified percentage of voting securities that, when taken together with voting securities already held or controlled by the offeror, would confer more than 50% of the voting rights in the target company. Similarly, under rule 10(1)(b), there must be a specified percentage which would confer a lesser percentage of the voting rights in the target company, subject to non-associated shareholders' approval.

[27]  The potential offeror has to choose whether to make an offer for a specified percentage of the target company's shares that would take its total control of voting rights to more than 50%, or choose a specified percentage that would take its voting control to 50% or less. In the latter case, the offer needs the approval of the majority of non-associated shareholders who choose to vote.

[28]  GPG argued that one offer could include alternative proposals under rule 10(1)(a) and (b) i.e. it could be for voting securities taking the offer above 50%, with an alternative that allowed acceptances for a lesser percentage. It also argued that the shareholder approval required for an offer to achieve control of less than 50% could seek approval for a range of percentages - in the present case, between 30% and 50%. This approach treated the higher percentage as the "specified percentage" for the purposes of the Code, with the lower range being accommodated within the concept of the "lower percentage" by reference to the provision for a minimum acceptance level to be stipulated for the purposes of rule 23(1)(b).

[29]  The Panel does not accept this interpretation. On the ordinary meaning of rules 9 and 10, they provide for a single offer, involving an election by an offeror as to the actual percentage figure sought by the offeror. This in turn will determine which of rule 10(1)(a) or (b) would apply. It does not contemplate that alternative offers can be made under both. The GPG interpretation would also provide for shareholder consent being sought in respect of a range of percentages.

[30]  It is inherent in the Panel's approach to the provisions that shareholder approval is to be sought for a specified percentage that the shareholders are informed of, and can assess for their own purposes. As submitted on behalf of Perry, shareholders may have different views to approving an offer for a lesser percentage, depending on whether it is pitched at 30% or 50%, or some point between the two.

[31]   Reasons for a partial offer being for only a single specified percentage of the voting securities of the target include:

(a)  For an offer that would result in the offeror holding less than the usual minimum percentage of more than 50% of the voting rights contained in rule 23(1)(a), the shareholders know exactly what they are voting for when approving the specified percentage being sought. This is consistent with the more elaborate process for obtaining shareholder approvals under rules 15 and 16;

(b)  The independent adviser, and the directors of the target company, will know exactly what offer they are being asked to assess or respond to.

Application of the Code to the proposed partial offer by GPG Forests for Rubicon

[32]   The GPG Forests offer is a partial cash offer for shares which provides only one opportunity for acceptance but two alternative outcomes. GPG Forests either obtains over 50% of the voting shares of Rubicon, or it obtains (with shareholder approval) control of between 30% and 50% of Rubicon. (See paragraphs 15 to 19 for a more detailed description of the proposed offer.)

[33]   On its face the GPG Forests offer does not comply with rule 9(3) which states that a partial offer must be made for a specified percentage of the outstanding shares of the target company. Inconsistently with that, the offer provides for alternative outcomes.

[34]   The Code prevents share-buying activity in the band between 20% and 50% unless it occurs under one of the limited exceptions to the fundamental rule. For partial offers in that band, where effective control may pass at a variety of points depending on the circumstances of a particular public issuer and the state of its share register, the Code only recognises the ability for an offer to be made where the shareholders have given approval to a specified percentage. That will then be the minimum acceptance (per rule 23(1)(b)) and any acceptances in excess of that percentage would have to be scaled.

[35]   Inconsistently with this analysis, the second limb of the proposed GPG offer is an attempt to redefine the specified percentage by the outcome of the offer, but subject to a minimum purchase of 12.5%. To attempt to redefine the specified percentage in this way:

(a)  Does not comply with rule 9(3) which requires a partial offer to be for a specified percentage;

(b)  Creates uncertainty as to the basis on which shareholders are accepting the offer and also because of the breadth of the range as to what shareholders are voting to approve;

(c)  Is an attempt to change the minimum acceptance condition to fit with the outcome of the offer in a manner which is not permitted by the Code.

[36]   The Panel considers that rule 10(1) does not permit a partial offer to be made in the alternative. The offer must be for one specified percentage that would take the offeror above 50% of the total voting rights of the target, or for one specified percentage that is in the range of 20 - 50%, but then only subject to shareholder approval. "Or" does not mean "and" or "and/or".

Policy rationale for the Code requirements

[37]   GPG argued that this approach was unrealistically narrow, and uncommercial. The Panel does not agree. Compared to takeovers codes in other countries the Code is relatively liberal in its approach to partial offers. The constraints created are consistent with the policy behind the Code.

[38]   The Code deals with changes in control of code companies. It provides additional restrictions on offers in the band between 20% and 50% of the voting rights of the target, essentially because this is the range of percentages of voting rights within which effective control may pass from one party to another. The narrowly defined exceptions to share acquisitions in this band all require precise specification of the level of voting control that is being sought or achieved i.e. through an acquisition (rule 7(c)), an allotment (rule 7(d)), or a partial takeover (rule 7(b)).

[39]   In contrast, once control of more than 50% has been achieved some "creeping" is allowed under rule 7(e) and small changes in shareholding percentages are less critical. The approach the Panel adopts to rules 9 and 10 is consistent with these other reflections of the policy behind the Code, and the mode of control of takeover conduct that it uses.

[40]   In the Panel's view the approach GPG proposes would offend against the principle of requiring precision in the critical 20% to 50% band of voting control.

Determination of the first matter

[41]  For the purposes of section 32(3) of the Takeovers Act 1993 the Panel determines that it is not satisfied that the partial takeover offer for Rubicon of which notice was given by GPG Forests on 28 August 2002 would comply with the Code.

Restraining orders

[42]  In terms of section 32(4) of the Takeovers Act 1993 the Panel made an order restraining GPG Forests from acquiring securities in Rubicon through the making of a partial offer substantially in the form of the notice given by GPG Forests on 28 August 2002.

[43]  The order will expire at 5.00 p.m. on Friday 27 September 2002.

[44]  The Panel observes that there are provisions in the Code that enable offers to be made on different terms and conditions from those contained in the takeover notice.

[45]  The Panel accepts that this proposal has raised points not previously considered by it, and that GPG has pursued the proposal in good faith. Except for the issue of costs, which will be addressed separately in terms of the Takeovers (Fees) Regulations 2001, the Panel considers there is no justification for seeking other orders from the Court under sections 34 or 43 of the Act.

Second issue for determination

[46]  The second issue for determination is whether, as a consequence of the Court order obtained by GPG prohibiting Perry from disposing or agreeing to dispose of its shares in Rubicon, the partial takeover offer of which GPG Forests gave notice on 28 August 2002 would comply with the Code.

Background

[47]  Prior to 11 July 2002, Perry held 4.89% of the shares in Rubicon but also had a further interest in Rubicon through cash-settled equity swap contracts. Upon termination of Perry's equity swap arrangements, on 11 July 2002 Perry increased its shareholding in Rubicon to 15.98%.

[48]  GPG argue that as a result of the cash-settled equity swap contracts Perry was a holder of relevant interests in more than 5% of the securities of a public issuer for the purposes of section 20 of the Securities Amendment Act 1988 and accordingly should have filed a substantial security notice in respect of that interest.

[49]  Perry is of the view that its interests in cash-settled equity swap contracts did not constitute a relevant interest for the purposes of the Securities Amendment Act. The Panel takes no view on this question.

[50]   On 12 August 2002 GPG filed proceedings in the High Court against Perry, Richard Perry and Rubicon alleging a breach of section 20 of the Securities Amendment Act. The proceedings seek remedies including forfeiture of Perry's Rubicon shares and restrictions on Perry's right to vote its shares.

[51]  The Panel was told that on 14 August 2002 GPG's solicitors sought an undertaking from Perry that it would not dispose or agree to the disposal of its Rubicon shares but Perry did not respond to this request. On 16 August 2002 GPG filed an ex parte application for interim injunctions restricting Perry from disposing or agreeing to the disposal of its shares in Rubicon. The Panel was advised that Perry did not oppose the application on the condition that it was granted a priority fixture for the substantive case. It is anticipated that the hearing will commence on 2 October 2002. The order preventing Perry from disposing or agreeing to the disposal of its shares in Rubicon was made on 28 August 2002.

Perry Corporation's submission

[52]  Phillips Fox submitted for Perry that:

(a)  the actions of GPG in making a partial takeover offer after seeking an order restraining the action of Perry were not consistent with the objectives of the Code;

(b)  in seeking the injunction GPG had sought to obtain control of more than 20% of Rubicon's voting rights; and

(c)  the proposed offer did not comply with rule 9(2) of the Code.

[53]  These issues are addressed below.

Inconsistency with the Code

[54]  Phillips Fox, on behalf of Perry, submitted that:

GPG by making a takeover offer in the circumstances where it has brought a proceeding that seeks a forfeiture or permanent loss of voting rights against Perry, without disclosing its intention to make a takeover offer, has prevented all shareholders and Rubicon's board of directors from participating appropriately in the offer. In particular:

• this conduct alone could evidence GPG's bad faith toward the Court, this Panel and all other interested parties;
• GPG's intent at such time was to pursue a litigation of no merit solely to hamstring those who may not share GPG's views with regard to its undisclosed takeover plans by:
  • constraining other shareholders from fully pursuing their respective rights;
  • constraining other potential bidders from making bids for Rubicon; and
  • constraining Rubicon's non-GPG directors from discharging their respective obligations.
• such conduct clearly violates the stated objectives of the Code as set forth in Section 20 of the Act.

[55]  The issue is however that the Panel may make a determination under section 32 only if it is satisfied that a person has not acted, is not acting or intends not to act in accordance with the Code. The Panel considers that the grounds stated by Perry, if in fact they are substantiated, do not provide evidence that GPG has not acted, is not acting or intends not to act in accordance with the Code.

Obtaining of more than 20% of voting rights without complying with Code

[56]  Phillips Fox, on behalf of Perry, also argued that "in seeking the injunction in respect of Perry's shares GPG has already sought control of over 20% of Rubicon's voting power” and asked the Panel to consider whether the Code is breached by GPG's "clear intention to control in excess of 20% of Rubicon's vote prior to the takeover offer".

[57]  Rule 6(1) of the Code provides that except as provided in rule 7:

a person who holds or controls less than 20% of the voting rights in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company unless that person, and that person's associates, hold or control in total not more than 20% of the voting rights in the code company.

[58]  The order restraining the ability of Perry from disposing of, or agreeing to the disposal of, its shares in Rubicon does not prevent Perry from voting its shares. The order does not give GPG any increased voting rights in Rubicon.

[59]  Accordingly, the Panel considers that the obtaining of the restraining order against Perry does not amount to GPG obtaining control over an increased percentage of voting control for the purposes of the Code.

Compliance with rule 9(2)

[60]  Perry submitted that because it was restrained from disposing or agreeing to the disposal of its shares in Rubicon it is incapable of accepting the prospective offer from GPG Forests and accordingly the proposed partial offer by GPG will not be an offer "extended to all holders of voting securities" as required by rule 9(2).

[61]  Rule 9(2) provides:

A partial offer must be extended to all holders of voting securities of the target company other than the offeror.

[62]  The issue considered by the Panel was whether an offer has been extended to all holders of voting securities for the purposes of rule 9(2) if an offeror knows that an offer is incapable of acceptance by a major shareholder, particularly when this is a result of action taken by the offeror.

[63]  GPG submit that rule 9(2) requires the offer merely to be made to all shareholders and does not require that an offeree must be able to accept the offer. GPG argue that there may be many shareholders who are unable to accept an offer for various reasons. GPG states that if Perry's interpretation was correct no one would be able to make a takeover offer while any shareholder was precluded from accepting it. GPG state that this would undermine the objectives of the Code and the scope for defensive tactics would be greater.

[64]  The Panel essentially agrees with GPG on this issue. The offeror's obligation is to extend the offer to all shareholders of the target company. The court order presently prevents Perry from accepting the offer. If Perry were minded to do so they could readily apply (pursuant to leave expressly reserved by the Court) to vary the order to enable them to accept GPG's prospective offer.

[65]  Although the Panel will act under the Takeovers Act when it is not satisfied that a person has acted in compliance with the Takeovers Code, it is predictably concerned not to intrude on any matters which are the subject of existing court proceedings.

[66]  Accordingly, the Panel considers that the existence of the interim injunction would not, under rule 9(2) or otherwise, preclude the making of an offer for Rubicon shares.

[67]  The Panel observes, however, that if GPG were to succeed with its court action and have Perry stripped of either its shares or its voting rights this has the potential to result in an increase in GPG's voting rights in Rubicon that would not comply with the Code.

Determination for the second matter

[68]  For the purposes of section 32(3) of the Act the Panel is satisfied that the current interim injunction granted by the Court preventing Perry from disposing or agreeing to dispose of its shares in Rubicon would not render an otherwise Code-compliant offer to the shareholders for Rubicon in breach of the Code.

Further action

[69]  The Panel will deal with costs on Perry's application to the Panel separately in terms of the Takeovers (Fees) Regulations 2001.

DATED at Auckland this 6th day of September 2002

SIGNED for and on behalf of the Panel by the Chairperson