Charles Bolt of Bell Gully predicts the recently approved Takeovers Code will make many companies revisit their investment holdings.

As expected, the Takeovers Code ("the Code") has been approved by Cabinet and will come into force on 1 July 2001.

The Code means that to buy more than 20 percent of a listed company, you will have to comply with certain procedures. Significantly, someone such as Kirin would not be able to obtain control of a company such as Lion Nathan simply by taking out the majority shareholder. In one way or another, the minority shareholders would get to participate or at least have a say in such a transaction.

The merits of the Code were debated vigorously during the public submission period. On one side, the Stock Exchange and the Business Roundtable argued the Code would promote management inefficiency and transfer value away from major shareholders.

On the other side, those in the camp of Commerce Minister Paul Swain argued that the Code would improve New Zealand's sharemarket credibility by bringing it into line with countries including Australia and the United Kingdom.

The final version of the Code has not altered considerably from the version released for public submission. Notably, the panel has resisted the urgings of some to allow shareholders to "creep" between 20 percent and 50 percent.

Where to from here?
It will be interesting to see how those people with 20-50 percent holdings react between now and July 2001 when the code comes into force. Will they increase to 50 percent or will they sell down to 19.9 percent?

Also of interest will be how the panel deals with class exemptions because, as it stands, the Code has the potential to catch people out inadvertently. This will be of interest to many market participants, in particular institutions that may have connections to the sharemarket, and to particular listed companies through various parts of their businesses.

Listed companies will also be interested to see what the New Zealand Stock Exchange ("NZSE") does with its existing rules on takeovers. Will they be revoked, or will some parts remain? Will the NZSE apply similar rules to unit trusts, or will it maintain the status quo based on its view that a Code is not appropriate?

In the longer term, it will be interesting to see whether the introduction of the Code helps to encourage more confidence and overseas investment in the sharemarket, and whether it discourages takeover activity and promotes management complacency.

This is a general summary only and should not be taken as a substitute for specific advice.

Charles Bolt is a senior associate in Bell Gully's Wellington office.
Web site: Bell Gully
Email: charles.bolt@bellgully.com

March 2001