Introduction
A Takeovers Code was recommended by the statutory Takeovers Panel in 1995, but was rejected by the National Government. The Labour/Alliance Government has announced that it will now implement the Takeovers Code as soon as possible.

The Takeovers Code will significantly alter the regulatory regime for takeovers. Currently, the acquisition of a significant shareholding in a listed company must be made in accordance with the NZSE Listing Rules and the Companies Amendment Act 1963. Takeover offers made for unlisted companies must comply with the Companies Amendment Act. The Takeovers Code will replace the existing regimes where the target company is a "Code company".

It will not be permissible to contract out of the Code.

Administration and Enforcement
The Takeovers Panel is given broad powers to enforce compliance with the Takeovers Code and can issue a variety of restraining orders. However, there are procedural protections in place. Orders can only be issued after a meeting of the Panel, and the person considered to be in breach of the Code must be given notice of the meeting, and is entitled to be represented at that meeting.

Restraining orders may only be in effect for a limited period of time. However, if the Panel is not satisfied that a person has acted, or is acting, or intends to act in compliance with the Code, the Panel and certain other people (including any shareholder in the target company) may apply to the High Court for a number of restraining or remedial orders.
These may include orders for the disposal or forfeiture of shares, the loss of voting rights, and payment of compensation.

Pecuniary penalties may also be ordered, to a maximum of $5 million. Persons (including, presumably, directors, employees and legal, accountancy, and investment banking advisers) who have "aided, abetted, counselled or procured", or who are "directly or indirectly knowingly concerned in, or party to", the contravention can be liable under these provisions.

The Takeovers Panel also has the power to grant exemptions from compliance with the Code.

Code Company
A "Code company" is defined as a company listed on the NZSE (or listed on the NZSE within the prior 12 months) or a company that has 50 or more shareholders and $20 million or more of assets (for example, a co-operative company).

A unit trust (whether or not listed) will not be subject to the Takeovers Code. It should be assumed that the notification and timing requirements of the Listing Rules would be retained in respect of listed unit trusts. The Companies Amendment Act will continue to regulate written takeover offers in respect of a New Zealand company that is not a Code company.

Fundamental Rule
Under the Takeovers Code:
- A person may not become the holder or controller of more than 20 percent of the voting rights in a Code company; and
- A person who holds or controls 20 percent or more of the voting rights in a Code company may not increase their holding or control of voting rights in the Code company, except:
- Pursuant to an offer made in compliance with the Code; or
- As permitted in other limited circumstances set out in the Code.

Indirect acquisitions
"Control" is defined in the Code as direct or indirect effective control of a voting right. Accordingly, the Code regulates not only the direct acquisition of shareholdings, but also indirect acquisitions that give control over shares in a Code company. For example, the acquisition of shares in a company, which in turn holds a shareholding in a Code company, will be caught by the Takeovers Code.

Issues
The Takeovers Code regulates both transfers of shares and issues of shares.
Compliance Options
A person may become the holder or controller of an increased percentage of the voting rights in a Code company:
(a) Under a "full offer" or a "partial offer" complying with the Takeovers Code; or
(b) Where shareholder approval is obtained; or
(c) Where a person who holds or controls more than a 50 percent (but less than a 90 percent) shareholding acquires an increased shareholding of 5 percent or less in any 12 month period (measured against the lowest shareholding held in that period); or
(d) Where the person already holds or controls a 90 percent shareholding.

Full offer
A full offer must be for all the shares of a target company. The terms of the offer must be fair and reasonable as between classes of voting securities, as between voting and non-voting securities, and as between classes of non-voting securities.

Partial offer
A partial offer is an offer for less than all the shares of a target company. If made by a person holding or controlling a 50 percent or less shareholding, the offer must be for a number of shares that, when taken together with shares already held or controlled by the offeror, carry:
- More than 50 percent of the voting rights in the target company; or
- A lesser percentage approved by a majority of the shareholders of the target company (by voting rights) that respond to the bidder's request for approval of the lesser threshold.

A partial offer must be extended to all shareholders and must be made for a specified percentage of all shares (or for the same percentage of each class of shares). Any offer must be fair and reasonable as between classes of shares. If the offeror receives acceptances in excess of the level of shareholding sought under a partial offer, the Code provides for the scaling of excess acceptances on a pro rata basis.

Mandatory condition
Any offer made by a person not holding more than a 50 percent shareholding must be conditional on acceptances being received that will cause the bidder to have at least a 51 percent shareholding (or, in a partial offer, a lower level approved by target company shareholders).

Procedures

Same terms
A Code offer must be made on the same terms for all shares of the same class.

Duration
A Code offer must remain open for acceptance for between 30 and 90 days. If the Code offer is a full offer, and it is not conditional upon a minimum level of acceptances being received or any such condition is satisfied or waived, then the offer period may be extended by up to a further 60 days.

Conditions
The Takeovers Code limits the conditions that may be included in a Code offer. Under the Code it is no longer permissible to include a condition that:
- Depends on the judgment of the offeror or any of its associates; or
- The fulfilment of which is in the power, or under the control, of the offeror or any of its associates.

Accordingly, due diligence conditions and finance conditions may be prohibited under the Code. An offeror will still be able to make its offer conditional on certain other matters, such as there being a minimum level of acceptances received, or there not being a measurable drop in a relevant market index.

Variations
A Code offer may be varied:
- To increase the consideration offered;
- To add a cash component to the consideration;
- To include a cash alternative in the offer (with the prior approval of the target company's directors); or
- To extend the offer period (subject to the limits set out above).
Unlike the current regime, any increased consideration or cash alternative must be provided or offered to all accepting shareholders, even those who have accepted the offer before the variation is made.

An offer cannot be withdrawn unless a condition in the offer is not satisfied.

Independent adviser's reports
The following reports will need to be obtained from an independent adviser approved by the Takeovers Panel:
- Under a full offer, an independent report is required to verify that the consideration and terms of the offer are fair and reasonable as between any different classes of voting securities, as between voting and non-voting securities, and as between any different classes of non-voting securities.
- Under a partial offer, an independent report is required to verify that the consideration and terms of the offer are fair and reasonable as between any different classes of voting securities.
- Regardless of whether a full or partial offer is made, the directors of a target company must obtain a report from an independent adviser on the merits of an offer.

Offer documents and notices
A Code offer must be made in accordance with the following process:
- The offeror must notify the target company in writing of the offeror's intention to make an offer under the Code. The disclosure required by the offeror in this takeover notice is broader than the disclosure currently required under the Listing Rules and the Companies Amendment Act. Additional disclosures include:
* Unless the offer is a full offer conditional upon reaching a 90 percent shareholding, a statement as to the general nature of any material changes likely to be made to the business activities of the target company and its subsidiaries;
* Details of any escalation clauses, whereby any existing shareholder will or may receive any additional consideration or other benefit over and above that set out in the offer, or any prior shareholder will or may receive any consideration or other benefit as a consequence of the offer;
* If the consideration for the offer includes shares, copies of the offer documents (usually a prospectus and investment statement) required under the Securities Act 1978, unless the issuer has been listed on the NZSE for at least 12 months and certain other disclosures are made (including, importantly, disclosure of any "inside information"); and
* A certificate from the chief executive officer, chief financial officer, and the board of directors of the offeror certifying that the information contained in the offer document is true and correct, is not misleading, and includes all the information required to be disclosed by the offeror under the Takeovers Code.

- The target company must inform its shareholders (by notice to the NZSE, if it is listed) of its receipt of the takeover notice.
- At a later point, target company directors must provide further information to shareholders.This is broader than the disclosure currently required under the Listing Rules and the Companies Amendment Act, and includes:
* Whether any director or senior officer of the target company or their associates has any interest in any material contract to which the offeror or any of its related companies is a party;
* Any additional information within the knowledge of the target company that would make any information in the offeror's takeover notice, which in the directors' opinion is incorrect or misleading, correct or not misleading;
* The reason why any particular director dissents from a recommendation, or abstains from making a recommendation, as to whether or not to accept or reject the offer;
* A statement as to whether negotiations are underway on any extraordinary transaction (merger, reorganisation, acquisition or disposition of assets or shares, or change in share capital or dividend policy) as a consequence of the offer;
* Any other information which would reasonably be expected to affect the decision of the shareholders to accept or reject the offer; and
* A certificate from the chief executive officer, chief financial officer, and the board of the directors of the target company certifying that the information contained in or accompanying their statement is true and correct, not misleading, and includes all the information required to be disclosed by the target company under the Takeovers Code.

- Between 14 and 30 days after sending the takeover notice to the target company, the offeror must send its offer to the target shareholders. The offer must be in writing on the same terms and conditions as set out in the takeover notice.
- The offeror must notify the target company and the NZSE (if the target is listed) that offers have been made.
- All notices and documents provided to target or offeror must also be provided to the Takeovers Panel.

Defensive tactics
The Code prohibits the target company from adopting defensive tactics that may frustrate an offer, or result in shareholders being denied an opportunity to consider an offer or its merits, unless:
- Those tactics have been approved in a general meeting of the target company; or
- In certain other circumstances (such as pursuant to a contractual obligation, or directors' proposal that was approved before the target company received the takeover notice or became aware that its receipt was imminent) with the prior consent of the Takeovers Panel.

Dealings
During the offer period, the offeror may not sell any shares in the target company. Also, the offeror and its associates may not acquire any shares in the target company during the offer period, other than under the offer, unless the following conditions are met:
- The offeror must have made a full offer for cash or with a cash alternative;
- The offer documents must disclose the possibility that such an acquisition could be made, and the acquisition must be made in cash no later than 14 days before the expiry of the offer period;
- The acquisition must not result in the offeror and its associates exceeding the 20 percent threshold, unless the offer is unconditional;
- The Takeovers Panel must be advised of any acquisition; and
- If the consideration paid under such an acquisition is greater than the consideration payable under the offer, the offer will automatically be amended to increase the consideration payable under the offer to that paid under such an acquisition.

Compulsory acquisition
Compulsory acquisition provisions, similar to those contained in the Listing Rules, are included in the Takeovers Code. Accordingly, a person who holds or controls 90 percent or more of the voting rights in a Code company may compulsorily acquire, or be required to compulsorily acquire, the remaining equity securities in the Code company.

Under the existing regime, an offeror can compulsorily acquire the remaining shares at a price, specified by the offeror in its compulsory acquisition notice, which is certified by an independent appraiser as being fair to the remaining shareholders (subject to those shareholders' right to object to that price and have it determined by a second appraiser).

In contrast, the consideration to be paid for the remaining shares under the Takeovers Code will be determined as follows:
- If the offeror has crossed the 90 percent threshold by reason of acceptances under a Code offer, the consideration payable for the remaining shares must be the same as the consideration provided under the Code offer, provided that acceptances were received in respect of more than 50 percent of the shares that were subject to the Code offer; and
- Otherwise, the consideration payable for the remaining shares must be a cash sum, specified by the offeror in its compulsory acquisition notice, which is certified by an independent adviser to the offeror as being fair and reasonable (subject to the remaining shareholders' right to object to the price and have it determined by a second expert). The fair and reasonable value must be calculated by first assessing the value of all the shares in the relevant class and then allocating that value pro rata among all the shares of that class.

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

Russell McVeagh, law firm
Web site: Russell McVeagh

March 2001