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30 August 1993

News release

Takeovers Legislation

The Securities Commission is concerned at a series of statements in the media advocating a "wait and see" approach to takeovers legislation currently before Parliament. This legislation is to provide for the regulation of takeovers by establishing a Takeovers Panel which will issue and administer a Takeovers Code. It is suggested that the Companies Bill also before Parliament may provide sufficient safeguards for minority shareholders in the takeover process and that introduction of the Takeovers Code should be deferred in order to provide time to evaluate whether or not the Companies Act will be effective in this respect.

The Commission considers that it is important for the fair and efficient functioning of the New Zealand sharemarket that a Takeovers Code on the lines already proposed by the Takeovers Panel Advisory Group be finalised and issued along with company law package of legislation. For too long in New Zealand our sharemarket has suffered from the ease with which a controlling shareholder can "pass the parcel" and transfer a controlling interest to another party without the participation of the remaining shareholders. The result has often been a languishing market for minority parcels which have been excluded from the takeover process and the abuse of minority shareholders' rights.

The New Zealand sharemarket is part of an international network of markets. The leading markets with which we deal have takeover regimes which seek to provide fairness and disclosure in the takeover process. The reputation of our market will suffer if regulation, which has been promised in an area where our market has for so long been out of step, is to be deferred. The Commission has, for example, been told repeatedly by the Australian Stock Exchange that the absence of New Zealand rules of law about takeovers providing more adequate protection for minority shareholders represents an impediment to a reciprocal regime for listing securities of New Zealand companies already listed on the New Zealand Stock Exchange. The Takeovers Bill expressly stipulates that the Code must be harmonised as far as practicable with Australia. Any deviation from present plans would not be good.

The Commission considers that the faith placed in the provisions of the Companies Bill, when enacted, as providing effective safeguards to minority shareholders is misplaced. Certainly the improved statements of directors' duties and the greater degree of access to the courts which that Bill provides are welcome but these provisions alone do not adequately replace an effectively and promptly administered Takeovers Code. The Companies Bill aims to set a balance between the rights of directors to direct a company in accordance with business judgement and directors' obligations to the company not to act negligently or with bad faith. A stricter regime is needed when dealing with the takeover process where the negotiating party is a prospective shareholder to whom the duties of directors do not in the ordinary case apply. The Companies Bill relies on litigation to provide support for shareholders' rights. The litigation process is far too slow, too inefficient and too expensive to provide the prompt and efficient action which will be needed for the passing of control and the possible dissipation of assets.

It needs to be recognised that a feature of the New Zealand sharemarket is that in over 80% of listed companies there is a substantial shareholder holding 20% or more of the share capital. It is not surprising that there has been vocal opposition from those with entrenched positions to the introduction of a Takeovers Code which would require an offer to be made to all shareholders by any party which seeks to acquire 20% or more of a company's shares. What is more surprising is that five leading institutional investors have added their voice in a submission which has recently been publicised. Some institutional investors have been able to accommodate their own interests to the circumstances of an unregulated market, by direct negotiation with substantial security holders. Nevertheless it would be tragic if the considerable, even if long overdue, efforts to establish a panel and develop a code for the protection of all shareholders were to be stalled off yet again by the determined hostility of a few major investors whose views are not shared by the general investing public.