Transactions

BEFORE THE TAKEOVERS PANEL

Background

[1]  Rubicon Limited ("Rubicon") is a "code company" under the Takeovers Code ("the Code") by virtue of being party to a listing agreement with NZX Limited, a registered exchange, and having its 249,186,699 ordinary shares ("shares") quoted on that exchange's "NZSX" market.

[2]  On 27 April 2009, a group of related investment funds collectively known as "Knott" (being Knott Partners, L.P., Knott Partners Offshore Master Fund, L.P., Commonfund Hedged Equity Company, Good Steward Trading Company SPC, Mulsanne Partners, L.P., Shoshone Partners, L.P., and Focus 300 Ltd) made a partial takeover offer ("the offer") under rule 7(b) of the Code for 10.83% of the shares in Rubicon that those funds did not already hold or control.

[3]  Knott's offer document disclosed that collectively Knott was the beneficial owner of 46,098,150 Rubicon shares, representing 18.50% of the company. The offer document also disclosed that an associate of Knott, David M. Knott ("Mr Knott"), controlled or was the beneficial owner of a further 2,446,500 Rubicon shares, representing 0.98% of the company. Successful completion of the offer would result in Knott increasing the percentage of voting rights in Rubicon that it held or controlled (its "voting control") to 27.33% (and to 28.31% with its associate Mr Knott).

[4]  Under the Code, if successful completion of a partial offer would result in the offeror having voting control of 50% or less, shareholder approval for the offer is required under rule 10 ("rule 10 approval"). The offer was therefore subject to rule 10 approval being obtained.

[5]  Voting rights held by the offeror and its associates must be disregarded for the rule 10 approval.

[6]  Knott's offer closed on 27 May 2009. The next day, Rubicon made a market announcement which stated:

…the Offer required more than 50% of Rubicon shares (other than those held by Knott and associates) voted to be cast in favour of Knott exceeding the 20% Takeovers Code threshold and moving to 27.33%. Computershare has advised Rubicon that this voting approval has now been received. Over 80% of the Company's shares (excluding those owned by Knott and associates) were voted, and approximately 77% of those voted to approve the Offer…

[7]  Later the same day Knott made a market announcement which included the following text:

…The offerors understand that sufficient approval votes have been received to satisfy the condition set out in paragraph 6.2 of the Offer document (and Rule 10 of the Takeovers Code).

The offerors have also determined to treat all outstanding conditions set out in clause 6.3 as satisfied. 

Accordingly, the Offer is now unconditional. Payment in respect of the shares acquired under the Offer will be made not later than 4 June 2009…

[8]  On 29 May 2009, the Panel received a letter from Quigg Partners, acting for Third Avenue International Value Fund ("Third Avenue"). Third Avenue was the beneficial owner of 44,893,185 Rubicon shares, representing 18.02% of the company. The letter advised that Third Avenue had voted against the offer and that, on the information available, it appeared that Third Avenue's votes had been miscounted.

[9]  Consequently, on 29 May 2009, the Panel sought and received an enforceable undertaking under section 31T of the Takeovers Act 1993 ("the Act") from Knott that it would defer settlement of the offer until the Panel determined that the matter was resolved. The undertaking was sought to maintain the status quo.

[10]  At the same time, Quigg Partners had contacted Rubicon directly. Rubicon immediately arranged for its share registrar, Computershare Investor Services Limited ("Computershare"), to recheck the votes and for its auditor, KPMG, to validate the recheck1. The recheck and validation supported the voting results initially given by Computershare to Rubicon.

[11]  On 2 June 2009, the Panel received a further letter from Quigg Partners. It advised that enquiries had revealed that, due to an administrative error, Third Avenue's votes had not in fact been cast.

[12]  However, Quigg Partners' letter raised a further issue. It noted that, given Third Avenue had not voted, Computershare's voting figures indicated that more than the eligible number of votes must have been cast. This appeared from the following analysis:

(a)  There was a maximum of 200,642,049 eligible votes. This reflected the 249,186,699 Rubicon shares on issue, less the 48,544,650 owned or controlled by Knott and Mr Knott.

(b)  Computershare had tallied 163,650,315 votes in total (being 126,648,822 in favour and 37,001,493 against). Adding Third Avenue's 44,893,185 shares that had not been voted gave a total of 208,543,500 votes. This was greater than the maximum number of eligible votes.

[13]  On 3 June 2009, the Panel received a letter from Chapman Tripp, acting for Knott. It advised that enquiries had revealed that 45,460,950 of Knott's 46,098,150 shares had in fact been voted in favour of the rule 10 approval.

[14]  Chapman Tripp's letter noted that the voting of the Rubicon shares beneficially owned by Knott (“Knott's shares”) was inconsistent with the requirements of the Code. It advised that casting of the vote was unintentional, had occurred due to an error “at a very administrative level”, and without the knowledge or countenance of Knott's senior executives.

[15]  The Panel met on 4 June 2009 to consider what action to take. Quigg Partners, for Third Avenue, had submitted that the voting of Knott's shares had invalidated the rule 10 approval and that the appropriate course was to hold the rule 10 vote again. In response, Chapman Tripp, for Knott, had submitted that there was no such invalidation and that the appropriate course was to recount the votes, disregarding those cast on Knott's shares.

[16]  The Panel considered that the voting of Knott's shares had not invalidated the rule 10 approval process. The recounting of the votes, disregarding those cast on Knott's shares, still resulted in the rule 10 approval being passed, by 81,187,872 votes in favour to 37,001,493 against. The Panel considered that the immediate matter was resolved and released Knott from its undertaking, allowing the offer to settle.

[17]  However, the Panel considered that, in the circumstances, the voting of Knott's shares may have constituted conduct that was misleading or deceptive, or likely to mislead or deceive, in terms of rule 64 of the Code. No submissions were made for Third Avenue on the issue of compliance with rule 64. The Panel decided to explore the issue on its own volition.

The Panel's initial actions

[18]  The following day, on 5 June 2009, the Panel met to consider whether to convene a meeting under section 32 of the Takeovers Act in order to determine the unresolved issues surrounding the rule 10 voting process and the announcements in relation to Knott's partial offer for Rubicon.

[19]  At the 5 June 2009 meeting, the Panel considered that one or more of Mr Knott, Dorset Management Corporation ("Dorset), Knott Partners, L.P., Knott Partners Offshore Master Fund, L.P., Commonfund Hedged Equity Company, Good Steward Trading Company SPC, Mulsanne Partners, L.P., Shoshone Partners, L.P., Focus 300 Ltd, Goldman, Sachs & Co ("Goldman Sachs"), ANZ Nominees Limited ("ANZ Nominees"), Riskmetrics Group, Inc. ("RiskMetrics"), and any person or persons acting on one or more of their behalves may have acted, may not be acting, or may intend not to act in compliance with the Code. Accordingly, the Panel decided to convene a meeting under section 32 of the Takeovers Act to determine the issue.

[20]  The Panel also passed the following resolution:

Rubicon is a "code company" by virtue of being party to a listing agreement with the NZX, a registered exchange, and having its ordinary shares quoted on the NZSX market.  

Knott is a group of related investment funds. As at 29 April 2009 those funds were the beneficial owners of 46,098,150 shares in Rubicon, representing 18.50% of the total number on issue in the company. Dorset Management Corporation ("Dorset") provides management services to Knott. David M. Knott is the sole shareholder, director and president of Dorset. David M. Knott also holds senior roles in each of the vehicles that comprise Knott. Knott has disclosed that Dorset and Mr Knott control the shares that it beneficially owns. Additionally, Mr Knott either controls or is the beneficial owner of a further 2,446,500 Rubicon shares, representing 0.98% of the company.  

As at 29 April 2009 New Zealand Central Securities Depository Limited ("NZCSD") was the registered holder of 208,239,356 Rubicon shares, representing 83.57% of the total number on issue. NZCSD is a depository system administered by the Reserve Bank of New Zealand, which acts as custodian for, and administers trading between, its members. NZCSD's members are New Zealand based custodians which, in turn, act as nominees for international custodians. Accordingly, it appears that there are layers of nominees between NZCSD and the ultimate beneficial owners of the shares held by NZCSD.

The shares beneficially owned by Knott are held by NZCSD and controlled by Knott through several layers of nominees, in the manner described above.  

On 27 April 2009 Knott made a partial offer ("the offer") for Rubicon under rule 7(b) of the Code. Dorset acted in concert with Knott for the purposes of that offer. The offer was for 10.83% of the shares in Rubicon not already held or controlled by Knott ("the specified percentage"). Consummation of the offer would result in Knott and its associates increasing their aggregate voting control in Rubicon to 28.31%. Consequently, shareholder approval for the offer was required under rule 10 of the Code, in accordance with the voting process set out in that rule.  

Under rule 10, voting rights held by the offeror and its associates must be disregarded for the purposes of the approval of the offer. Approval is obtained if the offerees (i.e. the offerees of the offer) approving hold more voting rights than the offerees who object.

45,460,950 of the 46,098,150 shares beneficially owned by Knott were voted to approve the offer for the purposes of rule 10. It appears that the registered holder of those shares is NZCSD and that those shares were controlled by Knott down through Goldman Sachs in the United States and ANZ Nominees in New Zealand (ANZ Nominees is a member of NZCSD).

Rubicon determined the outcome of the rule 10 vote, assisted by its share registrar, Computershare. The votes cast on the shares beneficially owned by Knott were counted towards the rule 10 approval. Rubicon made a market announcement on 28 May 2009 which stated:  

…Firstly, the Offer required more than 50% of Rubicon shares (other than shares held by Knott and associates) voted to be cast in favour of Knott exceeding the 20% Takeovers Code threshold and moving to 27.33%. Computershare has advised Rubicon that this voting approval has now been received. Over 80% of the Company's shares (excluding those owned by Knott and associates) were voted, and approximately 77% of those voted to approve the Offer…  

Also on 28 May 2009, shortly after Rubicon's announcement, Knott issued a market announcement which stated:  

…The offerors understand that sufficient approval votes have been received to satisfy the condition set out in paragraph 6.2. of the Offer document and (and Rule 10 of the Takeovers Code)...

The fact that the shares beneficially owned by Knott had been voted on the rule 10 issue was only advised to Rubicon after Rubicon had determined the question of rule 10 approval and announced the results to the market.

The Panel considers that the act of voting shares beneficially owned by Knott, in the particular circumstances of the case, may constitute conduct which is misleading or deceptive, or likely to mislead or deceive, in terms of rule 64 of the Code, and therefore prohibited by that rule.

[21]  On 5 June 2009, the Panel gave notice of the meeting to Mr Knott, Dorset, each of the Knott funds, RiskMetrics, ANZ Nominees, New Zealand Central Securities Depository Limited ("NZCSD"), Computershare and Rubicon. The Panel also sent summonses to each of those persons requiring them to attend the meeting and provide documents to the Panel.

[22]  The Panel published notice of the meeting to be convened under section 32 of the Takeovers Act on 5 June 2009. The Panel also issued a press release summarising the Panel's action.

[23]  The Panel had also intended to send the notice of meeting and a summons to Goldman Sachs the same day. However, the Panel encountered some difficulty in identifying the appropriate contact within that organisation. Accordingly, the documentation was not sent until the afternoon before the date of the meeting.

The Panel's section 32 meeting

[24]  The Panel's meeting under section 32 of the Act was held in Auckland on 10 June 2009. The meeting ran from 8:30 a.m. NZST until just after midday that day. It was then adjourned for a meeting via phone-conference the following day. (The reason for this is explained in more detail in paragraph 26 below). Videoconferencing facilities were arranged so that persons summonsed from overseas could conveniently attend the 10 June 2009 meeting. Phone-conference facilities were also arranged as a back up to the videolink.

[25]  The Panel heard the following evidence on 10 June 2009. Mr Knott and an administrative assistant within Dorset, Ms Alison Chiappone ("Ms Chiappone"), gave evidence from New York via videolink. Mr Steven Friedman ("Mr Friedman"), General Counsel of RiskMetrics, gave evidence from the United States via phone-conference. Evidence was given in person by representatives of ANZ Nominees, NZCSD, Computershare and Rubicon. Goldman Sachs was not able to organise a representative to attend the meeting (either in person, by video conference or phone conference). However, it had instructed New Zealand counsel, who made a statement and submissions on its behalf.

[26]  At the conclusion of the hearing of evidence from Mr Knott and Ms Chiappone, the Panel decided that it should also hear evidence from David J. Jeuda ("Mr Jeuda"), who holds the position of Chief Financial and Compliance Officer within Dorset. The Panel was advised that Mr Jeuda was not available to attend the 10 June 2009 meeting because he was on leave and on an aeroplane. However, it was arranged that he would give evidence to the Panel via phone-conference the following day. Accordingly, following the conclusion of the hearing of evidence on 10 June 2009, the Panel adjourned the section 32 meeting. The Panel reconvened the meeting on 11 June 2009 at 7:45 a.m. and heard evidence from Mr Jeuda via phone-conference from 8:00 a.m. to 8:50 a.m NZST.

The Code's rules on partial offers

[27]  Rule 6 of the Code, known as the "fundamental rule", prohibits anyone from increasing their voting control in a Code company if, after that increase, the aggregate voting control of the person and its associates exceeds 20%. However, such increases are permitted where one of the mechanisms set out in rule 7 is used. A partial offer under rule 7(b) is one of these mechanisms.

[28]  In a partial offer, the offeror makes an offer for a percentage of the target company shares that it does not already hold or control (the "specified percentage"). This offer is extended to all target company shareholders (other than the offeror) on the same basis. A target company shareholder may accept the offer in respect of none, some or all of its shares. Where the total number of acceptances tendered is greater than the number of shares sought (i.e. represented by the specified percentage) the number of shares taken up from each acceptor who accepts in respect of greater than the specified percentage of their shares must be adjusted, or "scaled", on a pro-rata basis.

[29]  If successful completion of a partial offer would result in the offeror having voting control in the target company of 50% or less, the offer is subject to two main requirements:

(a)  At least the number of shares that are represented by the specified percentage must be accepted into the offer; and

(b)  Rule 10 approval for the offer must be obtained in accordance with the processes set out in that rule.

[30]  Rule 10 provides:

10 When an 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 1 only of the following:

(a) a partial offer for a specified percentage of the voting securities of each class not already held or controlled by the offeror that, when taken together with the voting securities already held or controlled by the offeror, confers more than 50% of the voting rights in the target company; or

(b) a partial offer for a specified percentage of the voting securities of each class not already held or controlled by the offeror that, when taken together with the voting securities already held or controlled by the offeror, confers 50% or less 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 50% or less of the voting rights in the target company:

(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 end of the offer period.

(2) A target company, or its agent, that receives an approval or objection before the expiration of the offer period must, if requested by the offeror, send a copy of the approval or objection to the offeror within 2 days of its receipt.

[31]  Accordingly, rule 10 approval is obtained if shareholders who vote in favour of the offer hold more shares than those who vote against it. In the Panel's view, the only votes to be cast are those of an offeree, who is a target company shareholder as at the "record date" for the offer. The votes must be received by the target company before the expiration of the offer period.

The Code's prohibition on misleading or deceptive conduct

[32]  Rule 64 came into force on 29 February 2008 and provides:

64 Misleading or deceptive conduct

(1) A person must not engage in conduct that is-

(a) conduct in relation to any transaction or event that is regulated by this code; and

(b) misleading or deceptive or likely to mislead or deceive.

(2) A person must not engage in conduct that is-

(a) incidental or preliminary to a transaction or event that is or is likely to be regulated by this code; and

(b) misleading or deceptive or likely to mislead or deceive.

[33]  "Engaging in conduct" is defined by rule 2(2) of the Code:

engaging in conduct means doing or refusing to do an act, and includes,-

(a) omitting to do an act; or

(b) making it known that an act will or will not be done

[34]  Rule 64 is similar in wording to the civil prohibition against misleading or deceptive conduct in trade in section 9 of the Fair Trading Act 1986. The jurisprudence surrounding section 9 of the Fair Trading Act is relevant to rule 64 of the Code.

[35]  Broadly, the Panel considers that a breach of rule 64 requires the satisfaction of each of the following three steps:

(a)  Has a person "engaged in conduct" in terms of rule 2(2)?

(b)  Does the conduct relate to a transaction or event regulated by the Code or is the conduct incidental or preliminary to a transaction or event regulated by the Code?

(c)  Is the conduct misleading or deceptive, or likely to mislead or deceive?

[36]  The Panel notes the following points in respect of the above test:

(a)  "Conduct" includes omissions as well as acts2;

(b)  Where conduct includes silence, it may fall foul of rule 64 if there is a reasonable expectation of disclosure, either objectively or from the point of view of the person allegedly misled3;

(c)  An intention to mislead or deceive is not an element of the test. Unintentional or inadvertent acts or omissions can fall within the scope of the prohibition4;

(d)  Harm is not an element of the test. Conduct which has no actual or direct adverse consequences may still fall within the scope of the prohibition5;

(e)  Although intention and harm are not necessary elements of the test, their existence will go towards the seriousness of the breach and therefore have a bearing on the appropriate remedy6;

(f)  An absence of fault, or the fact that all reasonable care has been taken, will not generally prevent conduct being misleading or deceptive, accepting that a defence similar to the statutory defence under section 44 of the Fair Trading Act or a defence of total absence of fault may be available7;

(g)  To mislead or deceive means to cause a person to labour under some "erroneous assumption" or misconception8;

(h)  There is no requirement that any person actually be misled, although this may be evidence that the conduct was misleading or deceptive or likely to mislead or deceive9;

(i)  Rather, the relevant test is whether it would be reasonable for a representative member of the target audience of the conduct to be misled by the conduct.10

Dorset's decision making structure and the nature of its ownership of Rubicon shares

[37]  Knott is the beneficial owner of Rubicon shares. However, Knott is not the registered holder of the shares it owns. Instead, it holds its interest in those Rubicon shares through various layers of custodians (these are referred to as bare trustees / nominees in the text below). Knott has also entered into additional arrangements relating to the administration of the voting of its shares. The chains of economic ownership and control are described in more detail below.

Organisational structure of Knott and Dorset

[38]  Each Knott fund is party to an investment management contract with Dorset. Under these contracts Dorset has discretion over the acquisition, disposition and voting of the securities held in the Knott funds.

[39]  Mr Knott is the president and sole shareholder of Dorset. He also holds senior positions in each of the funds that comprise Knott. In his role as president of Dorset, Mr Knott has sole voting and investment discretion over the holdings of the various Knott funds. A small team of analysts assists Mr Knott in the making of voting and investment decisions.

[40]  Mr Jeuda holds the position of Chief Financial and Compliance Officer within Dorset. He has had the role of Chief Financial Officer for Dorset since November 1990 and the additional role of Chief Compliance Officer for about the last four years. Mr Jeuda reports to Mr Knott.

[41]  Dorset also employs a small number of administrative staff, including Ms Chiappone. Ms Chiappone has worked as an administrative assistant for Dorset for about 18 years. Those administrative staff report primarily to Mr Jeuda but may also report to Mr Knott on certain occasions.

Holding structure of Knott's investment in Rubicon

[42]  Goldman Sachs acts as "global custodian" for Knott and Dorset. The rights Goldman Sachs has in respect of those Rubicon shares are held as nominee / bare trustee for and on account of Knott.

[43]  The rights Goldman Sachs has in relation to Rubicon shares are subject to certain "sub-custody agreements" under which ANZ Nominees acts as "local custodian" for Goldman Sachs. Under these arrangements ANZ Nominees acts as bare trustee / nominee for and on account of Goldman Sachs in respect of those rights. ANZ Nominees appears to also act as a local custodian for other beneficial owners of Rubicon shares besides those upstream of Goldman Sachs. ANZ Nominees communicates with Goldman Sachs in Hong Kong which in turn communicates with Goldman Sachs in New York.

[44]  ANZ Nominees is a "member" of the Austraclear clearance and settlement system for high value trades in New Zealand debt and equity securities. In order for shares to be traded under this system they must first be "lodged" with NZCSD. Lodgement involves the shares being registered in the name of NZCSD which thereby becomes the registered holder of those shares.

[45]  NZCSD, in its role as the "custodian" of the system, holds those shares as nominee / bare trustee for and on account of the lodging member. Those shares can then be traded between members without any change in registered holder. Austraclear members are typically large financial institutions. The Reserve Bank of New Zealand administers the Austraclear system and is the 100% owner of NZCSD.

[46]  In its capacity as custodian of the Austraclear system, NZCSD holds a large proportion of the shares on issue in Rubicon. As at the offer date of 27 April 2009, NZCSD was the registered holder of 212,775,794 Rubicon shares, representing 85.39% of the company. Those shares are held on account of a number of Austraclear members, including ANZ Nominees.

[47]  Computershare administers Rubicon's share register, as agent for the company.

[48]  Computershare is only notified of NZCSD as being the registered holder of the shares in Rubicon that are owned through members of the Austraclear clearance and settlement system. Similarly NZCSD is only aware of ANZ Nominees and other Austraclear members as holders of Rubicon shares. In turn ANZ Nominees only recognises Goldman Sachs (and its other clients) as the holder of shares. The beneficial owners of the shares are not visible to Rubicon (through Computershare) other than through general knowledge and substantial security holder notices.

[49]  In summary, Knott holds its beneficial interest in Rubicon shares though Goldman Sachs as global custodian, then ANZ Nominees as local custodian, then NZCSD as custodian of the Austraclear system and registered holder of those Rubicon shares.

[50]  This is illustrated by the following diagram:

Dorset's arrangements with RiskMetrics

[51]  RiskMetrics is a provider of risk management and corporate governance products and services.

[52]  Dorset receives RiskMetrics' "proxy advisory service".

[53]  Under the "proxy advisory service" Dorset has access, through RiskMetrics secure website, to research reports prepared by RiskMetrics' research division on voting matters arising in respect of securities held by Knott. The reports are prepared for RiskMetrics' client base as a whole. They are not bespoke reports prepared for Dorset. These reports include a voting recommendation.

[54]  RiskMetrics administers and documents the voting of securities held by Knott. It does so under an "implied consent" arrangement with Dorset. This provides that RiskMetrics' will vote such securities in accordance with the recommendation contained in its research report, unless Dorset gives an explicit instruction to countermand the recommended voting position. This arrangement was recorded in a document entitled "VOTE AUTHORIZATION REGISTRATION FOR DORSET MANAGEMENT CORP / 2869" signed by Mr Jeuda and dated 1 September 2005.

[55]  Dorset's implied consent arrangements with RiskMetrics do not appear to include the securities owned by Good Steward Trading Company. Mr Jeuda gave evidence that Good Steward is a socially responsible investment fund. Accordingly, Dorset would seek voting instructions directly from Good Steward on every voting matter, so as to ensure that the votes cast on Good Steward securities accorded with its ethical investment philosophy.

[56]  Voting instructions generated by RiskMetrics in respect of Knott's shares (excluding those owned by Good Steward) under the arrangements with Dorset would be passed to the custodian. From there, the instruction would be passed down the chain to the company in question, via its share registrar.

[57]  These arrangements are illustrated below:

[58]  Steven Friedman, for RiskMetrics, gave evidence that within the "proxy advisory service" there are two different divisions. One division comprises a research team that prepares the research reports, the other undertakes the mechanical process of voting shares. One division does not generally interface with the other on any given voting issue. He also told the Panel that the "proxy voting service" is largely automated. Voting instructions may be generated without human involvement.

[59]  Mr Jeuda gave evidence that Dorset had entered into the arrangements with RiskMetrics as a result of advice that a third party contractor such as RiskMetrics was best placed to ensure compliance with (and maintain evidence of compliance with) relevant regulations for managed investment funds.

Dorset personnel's knowledge of the arrangements with RiskMetrics

[60]  Mr Jeuda had signed the vote authorisation document which provided that RiskMetrics had "implied consent" to vote shares held by Knott in accordance with the recommendation contained in RiskMetrics' research report. He told the Panel in evidence that he was aware of the arrangements with RiskMetrics and of the need to countermand RiskMetrics' voting position in order to ensure the Riskmetrics' position was not voted in respect of Knott's securities.

[61]  Ms Chiappone was Dorset's usual contact with RiskMetrics. She gave evidence that she dealt with RiskMetrics when voting issues arose and was aware of the "implied consent" arrangements. She stated in evidence that she has in the past instructed RiskMetrics to change the vote from that recommended by RiskMetrics.

[62]  Mr Knott gave evidence that he was not aware of the arrangements with RiskMetrics because he was not involved in the administrative side of the business.

Dorset's normal voting procedure

[63]  The Panel heard evidence regarding the internal procedures at Dorset for the administration of a voting process for shares beneficially owned by Knott.

[64]  Notification of a shareholder vote would be emailed to Ms Chiappone and Mr Jeuda by the custodian through which the beneficial interest in those shares was held. In the case of Knott's Rubicon shares, this was Goldman Sachs. The e-mail would generally set a deadline by which instructions were to be lodged and before which they could be changed.

Good Steward

[65]  In respect of Good Steward's securities, Mr Jeuda would forward the custodian's notification e-mail to Ms Chiappone directing her to seek voting instructions from Good Steward directly.

[66]  Once those voting instructions had been received, they would be passed on to RiskMetrics, for execution on the deadline date. If no voting instructions were received, and Good Steward's securities would be abstained from the vote.

Knott funds other than Good Steward

[67]  In respect of the Knott funds other than Good Steward the process was different. Mr Jeuda would forward the custodian's notification e-mail to Ms Chiappone directing her to seek voting instructions from Mr Knott or, if appropriate, the analyst responsible for the securities.

[68]  RiskMetrics would receive notification of the voting issue from the custodian (probably at the same time as Dorset). RiskMetrics would then automatically generate a voting instruction based on the recommendation contained in its research report.

[69]  If Ms Chiappone received no specific voting instruction (for example, if the voting issue was a perfunctory matter such as the re-election of a company's directors) she would send no voting instruction to RiskMetrics. The automatic voting instructions generated by RiskMetrics would then be executed by the custodian on the deadline date.

[70]  If Ms Chiappone did receive a specific voting instruction, she would pass on that specific instruction to RiskMetrics, most commonly via e-mail. RiskMetrics would then change its instruction with the relevant custodian, for execution on the deadline date.

SPACS

[71]  One type of transaction where Ms Chiappone would frequently be instructed to vote in a particular way was for "special purpose acquisition company" ("SPAC") transactions. A SPAC is a shell company that raises money from the public with the intention of using that money to acquire a business entity, usually a privately owned business entity. Once a suitable business entity is found, the acquisition is put to a shareholder vote. If the shareholder vote is successful then those shareholders who voted against the acquisition are entitled to withdraw their investment.

[72]  Dorset had arranged a number of SPAC investments for its funds. Where those investments were held by the Knott funds, and an acquisition was to be put to a shareholder vote, the analyst primarily responsible for SPAC investments sometimes took the view that it would be better to vote against the proposal so as to withdraw the investment rather than to continue as a shareholder in the post transaction entity. Ms Chiappone would receive instructions to vote against the transaction accordingly and pass on those instructions by e-mail to RiskMetrics.

Dorset's procedure for voting in this case

[73]  Mr Knott and Mr Jeuda both gave evidence that they understood and agreed that the Rubicon shares of Knott and Mr Knott should not be voted on the rule 10 approval. They had received advice to this effect from Dorset's legal counsel. As a result of this, Mr Knott had specifically instructed his personal broker not to vote his own Rubicon shares on the rule 10 approval.

[74]  RiskMetrics was also aware of the requirement for the approval vote. Its research division prepared a report dated 13 May 2009 which recommended voting in favour of the rule 10 approval.

[75]  On 28 April 2009, Goldman Sachs sent an "event notification" e-mail to Ms Chiappone notifying Dorset of Knott's offer and seeking instructions as to the acceptance of Knott's shares into the offer. Two options were listed, "tender for cash" or "take no action - (default)". The header of a follow-up e-mail on 21 May 2009 containing substantially the same text advised "…if you do not respond by the stated deadline, you will be allocated the default action as stated in the text." The deadline set out in the e-mail was 25 May 2009.

[76]  On 19 May 2009 at 3:58 a.m. New York time Goldman Sachs sent a further "event notification" e-mail to Ms Chiappone and Mr Jeuda. This e-mail notified Ms Chiappone of the rule 10 approval vote and sought instructions for that vote in respect of Knott's shares. The e-mail stated "…please note that your instructions will be executed on the deadline date unless you explicitly instruct otherwise." The deadline date set out in the e-mail was also 25 May 2009.

[77]  It appears that RiskMetrics also received that later "event notification" and, pursuant to its arrangement with Dorset, automatically sent Goldman Sachs a voting instruction in respect of Knott's shares in accordance with the recommendation in its research report. This was a vote in favour of the rule 10 approval.

[78]  Later on the morning of 19 May 2009, at 5:46 a.m. New York time, Goldman Sachs sent a "response confirmation" e-mail to Ms Chiappone in relation to the rule 10 approval vote. This e-mail notified Ms Chiappone that Goldman Sachs had received instructions at 3:58 a.m. that morning to vote Knott's shares (excluding those owned by Good Steward) in favour of the rule 10 approval. The e-mail reiterated that the instructions would be executed on the deadline date of 25 May 2009 unless Goldman Sachs was explicitly instructed otherwise.

[79]  As noted above, Mr Jeuda understood that Knott's shares should be abstained on the rule 10 vote. Accordingly, he forwarded Goldman Sachs' 3:58 a.m. 19 May 2009 "event notification" e-mail to Ms Chiappone at 9:14 a.m. on 19 May 2009. He added the message: "…make sure we do not vote on this. We are the ones making tender offer." (The Panel was provided with a copy of this e-mail. It contained other information as well, but that other information had been redacted on the ground of legal privilege.)

[80]  Ms Chiappone gave evidence that Mr Jeuda had instructed her that the offer was Knott's offer and that therefore Knott's shares should not be accepted into it.

[81]  Ms Chiappone also gave evidence that she was not aware of the rule 10 approval process as distinct from the acceptance process. She told the Panel that, to the extent that she understood her instructions, they were that Knott's shares were not to be accepted into the offer.

[82]  Ms Chiappone gave evidence that when she received the Goldman Sachs 3:58 a.m. "event notification" and 5:46 a.m. "response notification" e-mails she thought they related to the acceptance process. It appears that when she received Mr Jeuda's 9:14 a.m. e-mail she thought that that also related to the acceptance process.

[83]  Accordingly, RiskMetrics was never instructed to change its automatically generated voting instruction in favour of the rule 10 approval and Goldman Sachs executed that instruction on the 25 May 2009 "deadline date".

The voting instruction is passed down the custodial chain

Goldman Sachs

[84]  Goldman Sachs' New Zealand counsel confirmed that RiskMetrics' instructions were passed on to ANZ Nominees.

[85]  Goldman Sachs' New Zealand counsel advised that Goldman Sachs was not asked to consider the application of the Code in relation to this matter, and it would be very unusual if it had. Goldman Sachs understood its role in this case as limited to passing on the voting instructions that it had received from its clients.

ANZ Nominees

[86]  Documents summonsed from ANZ Nominees disclosed that ANZ Nominees received the following voting instructions from its clients on the rule 10 approval: 

 It appears that "BENEFICIAL HOLDER 2" represents Goldman Sachs and that Knott's 45,460,950 votes were aggregated at the Goldman Sachs level with votes cast by other Goldman Sachs clients to result in the aggregate voting instruction in respect of 64,975,660 Rubicon shares.

[87]  On 26 May 2009, ANZ Nominees faxed NZCSD a consolidated approval form with instructions to vote in favour of the rule 10 approval in respect of 64,990,918 Rubicon shares. This appears to be the aggregate of the votes cast by "BENEFICIAL OWNER 1" and "BENEFICIAL OWNER 2" set out in the table above.

[88]  Mark Lawrence ("Mr Lawrence"), representing ANZ Nominees, gave evidence that ANZ Nominees generally does not look behind its client (in this case Goldman Sachs) to determine whether the underlying beneficial owner is complying with its Code obligations.

NZCSD

[89]  NZCSD received ANZ Nominees' instructions, and instructions from other Austraclear members. On 26 May 2009 it sent an approval form to Computershare in respect of 114,415,140 votes in favour of, and 35,128,461 votes against, the offer. Furthermore, on the same day, one of the Austraclear members sent in two approval forms directly to Computershare being in respect of 69,403 and 2,264,416 votes to approve respectively.

[90]  Mike Wolyncewicz ("Mr Wolyncewicz"), representing NZCSD, gave evidence that it did not occur to NZCSD to make any inquiry as to whether Knott's shares had been voted on the rule 10 approval until after it became apparent that there was some voting discrepancy. Prior to that coming to light, the total number of votes in respect of which instructions were received by NZCSD was less than NZCSD's total holding. Accordingly, even if NZCSD had known that Knott's shares were registered in the name of NZCSD, it would have been easy to assume that Knott's shares had not been voted.

[91]  Mr Wolyncewicz also gave evidence that NZCSD was not aware that the proportion of shares voted in this case was relatively high. This was due to the nature of NZCSD's operations. It considered that its role was to accurately pass on voting instructions, rather than to monitor the outcome of the shareholder vote.

Computershare

[92]  The partial takeover offer for Rubicon closed on 27 May 2009 at 5:00 p.m. Computershare then tallied the rule 10 approval votes. That tally suggested rule 10 approval had been obtained, by 126,648,822 votes in favour to 37,001,493 against, with 163,650,315 of Rubicon's 249,186,699 shares being voted.

[93]  Tim Bond ("Mr Bond"), representing Computershare, gave evidence that Computershare did not know, either anecdotally or through any historic contact, the identities of the beneficial owners of the shares registered in the name of NZCSD. Neither did Computershare know through how many layers of custodians those beneficial interests were held. Mr Bond gave evidence that Computershare's knowledge was limited to the registered holders of Rubicon shares.

Rubicon

[94]  Computershare passed its results on to Rubicon. On 28 May 2009, Rubicon made a market announcement at 11:57 a.m. including the following text:

…the Offer required more than 50% of Rubicon shares (other than those held by Knott and associates) voted to be cast in favour of Knott exceeding the 20% Takeovers Code threshold and moving to 27.33%. Computershare has advised Rubicon that this voting approval has now been received. Over 80% of the Company's shares (excluding those owned by Knott and associates) were voted, and approximately 77% of those voted to approve the Offer…

[95]  Early on in the offer process, Rubicon had written to its substantial security holders to ascertain the number of shares beneficially owned by them, for the purposes of preparing its target company statement. From the responses it received, Rubicon knew the following substantial security holder information: 

[96]  Rubicon also knew that NZCSD was the registered holder of 212,775,794 Rubicon shares, representing 85.39% of the company.

[97]  Along with the global voting tally, Computershare had also provided Rubicon with a schedule of voting approvals received on the day before the last day of the offer. This schedule related to the following approval forms received from NZCSD, or on its behalf: 

[98]  Luke Moriarty ("Mr Moriarty") and Mark Taylor ("Mr Taylor"), representing Rubicon, gave evidence as to how they had satisfied themselves regarding the voting approvals before making Rubicon's 28 May 2009 market announcement: The smaller two of the NZCSD votes were too small to represent any of the major shareholders. The 35,128,461 objections were identified as being Castlerigg's 35,118,461 shares with the addition of 10,000 others. The 114,415,140 approvals were identified as being votes cast by Perry Corp., Third Avenue and Cadian, with an additional 1.45 million other votes. A handwritten breakdown of the approval numbers as described above was handed to the Panel during the section 32 meeting and is reproduced below: 

[99]  Mr Moriarty also gave evidence that the total number of votes cast was less than the total number of shares eligible to vote and therefore it only became apparent that there was a voting discrepancy once it was discovered that Third Avenue's shares had not been voted. Mr Moriarty also submitted that even if Rubicon had asked Dorset whether Knott's shares had been voted, Dorset would have confirmed that Knott's shares had not been voted.

[100]  Mr Moriarty gave evidence that it was on the basis that the numbers were consistent with Knott's shares not being voted, and his understanding that Knott's shares were not permitted to be voted, that Rubicon assumed that Knott's shares had not been voted on the rule 10 approval. Rubicon made its 28 May 2009 market announcement based on that assumption.

The Panel's conclusions on the evidence as to how Knott's shares came to be voted

[101]  The Panel has come to the following conclusions as to how Knott's shares came to be voted and why that error was not discovered before Rubicon made its announcement.

[102]  Mr Knott and Mr Jeuda were aware that Knott's offer was subject to the two requirements, being receipt of sufficient acceptances and rule 10 approval. They also knew that Knott and its associates were not to accept shares into the offer and not to vote on the rule 10 approval. However, the existence of the rule 10 approval requirement and the instruction to abstain Knott's shares on that vote were not communicated to Ms Chiappone, Dorset's primary contact with RiskMetrics, in a manner that she understood and would therefore follow.

[103]  Ms Chiappone was aware of the implied consent arrangements with RiskMetrics to the extent that she knew RiskMetrics would vote Knott's shares in accordance with RiskMetrics' recommendation unless explicitly instructed otherwise. However, she did not understand the two step process. She understood that not to accept the offer was sufficient.

[104]  Consequently, when Ms Chiappone first saw Goldman Sachs' 3:58 a.m. 19 May 2009 "event notification" e-mail seeking instructions for the rule 10 approval, she thought Goldman Sachs was seeking instructions in relation to acceptance of the offer. She knew Knott's shares were not to be accepted into the offer and that by doing nothing the default action notified by Goldman Sachs of "take no action" would come into effect. Accordingly, she did nothing, thinking that would bring about the appropriate outcome.

[105]  Ms Chiappone would have likely first seen Goldman Sachs' 5:46 a.m. 19 May 2009 "response confirmation" e-mail at the same time she saw the 3:58 a.m. "event notification" e-mail. She mistook this e-mail as relating to acceptance rather than approval, again, because she was only focused on the acceptance process. Accordingly, it did not raise a question in her mind as to whether she was taking appropriate action by doing nothing in relation to it.

[106]  Ms Chiappone would have received Mr Jeuda's 9:14 a.m. 19 May 2009 e-mail with the instruction "make sure we do not vote on this. We are the ones making the tender offer" at the same time as, or soon after, seeing the Goldman Sachs e-mails sent earlier that morning. Ms Chiappone appears to have interpreted Mr Jeuda's instruction as being an instruction not to accept the offer in respect of Knott's shares, rather than an instruction not to vote for the purposes of rule 10. This misinterpretation appears to have arisen from the same misunderstanding: that all that was required in respect of Knott's offer was to ensure that its shares were not accepted into it.

[107]  Knott's offer closed at 5:00 p.m. on 27 May 2009. Computershare then tallied the votes it had received and advised Rubicon of the result of the rule 10 approval, being 126,648,822 votes in favour and 37,001,493 against (for a total of 163,650,315 votes).

[108]  The aggregation of votes through the chain of nominees, and by NZCSD, resulted in Rubicon and Computershare being unaware of the beneficial owners of the shares that were voted.

[109]  No person in the voting chain identified that an ineligible voting instruction had been issued in respect of Knott's shares, for the following reasons:

(a)  The division of the RiskMetrics business that prepared the research report was separate from that which processed the proxy votes. While the research team was aware that votes should not be cast on Knott's shares, they were not involved with the casting of those votes. In fact, the processing of voting instructions was largely automated, and it appears from the fact that the sending of Goldman Sachs' "event notification" e-mail and that the receipt of voting instructions by Goldman Sachs both occurred at 3:58 a.m. New York time on 19 May 2009, that it was automatically generated in this case;

(b)  Goldman Sachs was not asked to consider the Code or the Takeovers Act in this case and did not do so as a matter of course. Goldman Sachs' counsel advised the Panel that it would have been very unusual for such matters to be considered. Goldman Sachs considered its role to be that merely of a conduit;

(c)  Similarly, ANZ Nominees was not asked to consider the Code or the Act, nor did it do so as a matter of course. It also considered itself a mere conduit. Furthermore, even if ANZ Nominees had put itself on notice that Knott's shares were not to be voted, it would not have known as of right that the voting instructions it was passing on were in respect of Knott's shares because it did not know the identity of the ultimate beneficial owner of the clients standing behind Goldman Sachs;

(d)  NZCSD had considered Code issues in the past and was aware that Knott's shares should not be voted. However, there was nothing in the information available to it to put it on notice that Knott's shares may have been voted. The total number of voting instructions that it received was less than the eligible number of votes (i.e. the total that it held less the number beneficially owned by Knott). NZCSD was not generally aware of the normal levels of participation by a target company's shareholders in voting actions of this kind, so did not recognise that the level of votes cast was unusually high;

(e)  Computershare received the votes cast, totalled them and passed them on to Rubicon. As the share registrar it acted as agent for Rubicon. As far as it was concerned it could not look behind the NZCSD shareholding to track down the beneficial owners of the shares voted;

(f)  Rubicon was obviously aware that Knott's shares were not to be voted. It received the rule 10 approval numbers from Computershare and "sensibility" tested them against the major shareholder information that it had at hand. The numbers passed that test. They were consistent with Knott abstaining from voting its shares, Castlerigg voting against, and the other major shareholders voting in favour of the rule 10 approval. Rubicon had not been notified that Knott's shares had been voted. There was nothing to put Rubicon on notice of any voting irregularity until it became aware that Third Avenue's shares had not been voted, because Third Avenue and Knott owned similar numbers of Rubicon shares.

[110]  On the basis of the information received from Computershare, Rubicon made the 28 May 2009 market announcement including the following text:

…the Offer required more than 50% of Rubicon shares (other than those held by Knott and associates) voted to be cast in favour of Knott exceeding the 20% Takeovers Code threshold and moving to 27.33%. Computershare has advised Rubicon that this voting approval has now been received. Over 80% of the Company's shares (excluding those owned by Knott and associates) were voted, and approximately 77% of those voted to approve the Offer…

[111]  It was not until it became known that Third Avenue's shares had not been voted that the voting irregularity became apparent. Dorset became aware that Knott's shares had been voted on the rule 10 approval following enquiries made consequent on the voting irregularity becoming apparent.

[112]  On becoming aware that Knott's shares had been voted on the rule 10 approval, Rubicon made a market announcement, on 5 June 2009, correcting the figures that it had released to the market earlier. The announcement contained the following text:

Today Rubicon announced that it had become aware that shares owned by Knott Partners L.P. and certain associated funds ("Knott") had been voted in support of the Knott proposal to increase its Rubicon shareholding from 18.5% to 27.33%. Under the Takeovers Code, Knott is not able to vote any of their shares, and accordingly they must be disregarded in the voting returns.

If Knott's votes are disregarded, the amended Computershare voting statistics are that 59% of Rubicon's shares (excluding those owned by Knott) were voted, and approximately 69% of those voted to approve the Offer. The voting requirement under the Takeovers Code is that more than 50% of shares voted must be cast in favour of Knott increasing its ownership interest to 27.33% in order for the takeover offer to be approved by shareholders. Accordingly, this voting requirement (after disregarding the Knott shares voted) has been met.

The Panel's analysis of Dorset's conduct in terms of rule 64 of the Code

[113]  The Panel applied the facts found above to rule 64 of the Code in the following analysis.

[114]  Dorset "engaged in conduct" in terms of rule 64. The conduct in question was a combination of the following:

(a)  Dorset's omission to explicitly instruct RiskMetrics to abstain from voting Knott's shares on the rule 10 approval vote or to countermand RiskMetrics' voting instruction with Goldman Sachs; and

(b)  Dorset's omission to notify Rubicon prior to the close of the offer that Knott's shares had been voted on the rule 10 approval.

[115]  Dorset's conduct related to a "transaction or event regulated by the Code", namely Knott's offer.

[116]  The main enquiry for the Panel was whether the conduct was "misleading or deceptive or likely to mislead or deceive" in terms of rule 64.

[117]  Dorset's omissions to explicitly instruct RiskMetrics to abstain or to countermand RiskMetrics' voting instructions with Goldman Sachs resulted in Goldman Sachs executing RiskMetrics' instruction to vote in favour of the rule 10 approval in respect of the Rubicon shares beneficially owned by Knott (excluding those owned by Good Steward). This instruction was passed down the custodial chain to Computershare, Rubicon's share registrar.

[118]  Rubicon, with the assistance of its agent Computershare, had the primary responsibility of determining the outcome of the rule 10 approval. Rubicon was aware that the Rubicon shares beneficially owned by Knott were not to be voted on the rule 10 approval and that, in the event that those shares were voted, those votes were to be disregarded. Rubicon assumed that Knott was aware of and would comply with its obligation not to vote. The information available to Rubicon was consistent with Knott's shares not having been voted.

[119]  In this manner, Rubicon was brought to labour under the misapprehension that Knott's shares had not been voted and that the rule 10 approval had been obtained by a higher margin that it actually had. This misconception was communicated to the market by Rubicon's 28 May 2009 market announcement declaring the results of the rule 10 approval.

[120]  Although Rubicon was actually misled by Dorset's conduct, it does not necessarily follow that Dorset's conduct contravened rule 64, although it may be evidence of that fact. The test is whether it would be reasonable for the representative target company to be misled by Dorset's conduct in the circumstances of this case.

[121]  The Panel considers that it would be reasonable for the representative target company to be misled by Dorset's conduct in the circumstances of the case. The information available to Rubicon was consistent with the proposition that Knott's shares had not been voted on the rule 10 approval. Dorset had not notified Rubicon that Knott's shares had been voted. Less than the eligible number of shares were voted. The major shareholder information and the voting figures were consistent with the proposition that Knott had abstained, Perry Corp., Third Avenue and Cadian had voted in favour and Castlerigg had voted against.

Dorset's submissions

[122]  During the Panel's meeting under section 32 of the Act New Zealand counsel for Dorset and its associated entities provided submissions on whether or not conduct by his clients was misleading. Counsel for those parties relied on AMP Finance v Heaven (1997) 8 TCLR 144 for the proposition that for there to be misleading conduct the conduct had to have three essential elements being:

(a) That it was capable of being misleading;

(b) That the plaintiff was misled by the relevant conduct, and

(c) That it was reasonable for the plaintiff to have been misled.

[123]  Within the context of AMP Finance, that is undoubtedly correct given that it was a private claim for damages based on misleading and deceptive conduct. It would have been necessary for an individual plaintiff to show that it was misled in order to obtain an award of damages or other relief. However the position is different under the Code where it would not always be necessary to consider whether a particular entity or complainant had been misled. Rather, the focus is on the nature of the conduct itself as opposed to whether particular entities have, in fact, been misled. In any event, the Panel has no doubt that anyone reading, for instance, Rubicon's market announcement of 28 May 2009 could have been misled and very probably would have been.

[124]  Next, counsel for Dorset relied on section 5 of the Interpretation Act 1999 which lists the headings to parts of an enactment as relevant to its interpretation. He then referred to the heading to the part of the Code containing rule 64 being "Market Manipulation". He denied that any market manipulation occurred and accordingly there had been no misleading or deceptive conduct within the meaning of the Code. The Panel disagrees with this view: rule 64 is intended to refer to any conduct, in the sphere of activities covered by the Code, which is misleading and/or deceptive (or likely to be) irrespective of whether it also amounts to market manipulation.

[125]  Finally, Dorset submitted to the Panel that it did not intend to mislead. It acknowledged that whilst intention is not a requirement of the legal test for misleading or deceptive conduct, it is nevertheless a relevant factor for a Court's determination. The Panel agrees and has taken this factor into account in its determination.

Determination

[126]  The Panel determines, under section 32(3)(b) of the Takeovers Act 1993, that it is not satisfied that Dorset acted in compliance with rule 64 of the Code, in that it voted Knott's shares on the rule 10 approval. This conduct was misleading in the manner and for the reasons already described. Dorset's conduct came about through one or more omissions, namely omitting to explicitly instruct RiskMetrics to abstain Knott's votes on the rule 10 approval, or by omitting to countermand RiskMetrics' voting instructions to Goldman Sachs, and omitting to notify Rubicon that Knott's votes had been cast to approve of the offer.

[127]  The Panel notes that the conduct in question appears to have been inadvertent. There was no evidence presented to indicate that there was intent by any party to mislead or deceive.

[128]  The Panel also notes that it is not aware that the conduct has resulted in any direct harm or adverse effects.

[129]  The Panel further notes that, consistent with the principles arising from the case law surrounding section 9 of the Fair Trading Act, an absence of fault or the fact that all reasonable care has been taken, will not generally prevent conduct from being misleading or deceptive in terms of rule 64. As previously noted, absence of fault type defences are arguably available. Such defences do not have the effect of re-characterising the conduct as other than misleading but, rather, are defences which recognise that misleading conduct may be excused in some instances. However, no such defence was relied on here and nor does the Panel consider that such defence would be available.

[130]  The Panel takes the opportunity to make some further comment on the point of reasonable care and best practice, as well as its interpretation of rule 10 of the Code, below.

The Panel's comments on rule 10, rule 64 and best practice

[131]  The wording of rule 10 of the Code does not, at first blush, appear to prohibit the offeror and its associates from voting on the rule 10 approval. Rule 10(1)(b)(iv) states that "voting rights held by the offeror and its associates must be disregarded". This contrasts with rule 17 of the Code which imposes an explicit prohibition on parties to an acquisition under rule 7(c) or to an allotment under rule 7(d) from voting on that resolution. Rule 17(1) provides that "The persons acquiring and disposing of the securities and their associates must not vote on a resolution for the approval" of a rule 7(c) acquisition or a rule 7(d) allotment.

[132]  Rule 64 of the Code is a broad rule with general application to conduct in relation to Code regulated events. As such it colours the other rules of the Code. Conduct which may otherwise appear to be permitted by a Code rule, may, when interpreted in the light of the rule 64 prohibition, be effectively prohibited in certain circumstances. This accords with the underlying purpose of the rule being to encourage "commercial probity".

[133]  If the offeror or an associate votes its shares on a rule 10 approval then one of two things will happen. Either the target company, as the person who usually takes on the responsibility of determining the rule 10 approval, will be aware from the fact that the offeror is a registered shareholder that its shares have been voted and that those votes should be disregarded. Alternatively, the offeror or its associate will be put under an obligation to notify that target company that its shares have been voted so that those votes can be disregarded.

[134]  In both cases, the casting of the votes serves no purpose, as those votes will be disregarded in the proper course. Given that the casting of those votes may also potentially fall foul of rule 64, the Panel considers that the combined effect of rule 10 and rule 64 is to effectively prohibit shares owned by the offeror and its associates being voted on rule 10 approvals.

[135]  It follows that it falls on those who are subject to this effective prohibition to have adequate processes in place to ensure that their shares are not voted on the rule 10 approval or that if, by some inadvertent error, those shares are voted, the target company (or other person determining the rule 10 voting question) is immediately notified so that the votes can be disregarded.

[136]  As noted above, the target company will usually be the primary arbiter of the rule 10 approval. To ensure that the target company has discharged its duties in this role, the Panel suggests that it may be best practice for the target company to seek confirmation from the offeror that no votes have been cast on the rule 10 approval in respect of shares owned by the offeror and its associates.

[137]  There is a real possibility that significant harm could result from an offeror or its associates voting on the rule 10 approval. If those votes are not disregarded, then they may cause the rule 10 approval to be obtained when it would properly not be obtained. This would clearly be a significant adverse consequence warranting appropriate remedial action.

Remedies

[138]  The Panel is not aware of any direct harm or adverse effect resulting from Dorset's conduct. Accordingly, the Panel has decided, on the basis of the information currently available to it, not to seek any remedies against Dorset.

Costs

[139]  The Panel will make orders for costs against Dorset under the Takeovers (Fees) Regulations 2001 in accordance with the Panel's published policies for applying those regulations.

DATED at this 6th day of July 2009

SIGNED for and on behalf of the Panel by

Colin Glenn Giffney