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Offers of Securities in Takeover Bids

PART II
BACKGROUND

The Securities Act 1978

9. The Securities Act regulates the offer of securities to the public. The Act expressly excludes certain offers from being "offers of securities to the public" at section 3(2). Currently sections 3(2)(c) and 3(2)(d) exclude takeover offers made under Part I of the Companies Amendment Act 1963, and offers of securities made pursuant to a takeover code in force under the Takeovers Act 1993.

10. Sections 3(2)(c) and 3(2)(d) of the Securities Act have been repealed with effect on 1 July 2001, the day the Code comes into force, as will the Companies Amendment Act itself.

11. The Commission is considering whether to use its powers of exemption under section 5(5) of the Securities Act to create a class exemption in respect of some or all of the offers to which the Takeovers Code and the Securities Act both apply. With the repeal of section 3(2)(d) takeover offerors wishing to offer securities will need to comply with securities law but subject to any exemption from designated provisions of the Securities Act and Regulations under a Commission exemption, and to any conditions of exemption that the Commission may apply.

12. The purpose of this paper is to consider whether this power should be used, and if so, how.

Takeover offers

13. A takeover offer can be financed by cash, securities, or both. Consequently shareholders in a company that is the target of a takeover offer (the "target company") may be offered cash, or securities, or some combination of these as consideration for their shares in the target company.

14. If securities are offered as consideration in a takeover bid then that bid may also be an offer of securities to the public for the purposes of the Securities Act 1978. Potentially several types of circumstances arise in which securities may be offered in a takeover offer:
    1. newly issued securities or previously allotted securities;

    2. debt or equity securities;

    3. securities that are issued by the offeror itself or securities issued by a third party.

The Takeovers Code

15. The Takeovers Code was enacted under the authority of the Takeovers Act 1993, and will come into force on 1 July 2001. The Code will govern any takeover offer made for a "Code company", the term used in the Code for companies under its jurisdiction. A Code company is any company that is listed on the New Zealand Stock Exchange ("NZSE"); any company that has been listed on the NZSE within the last twelve months; or any company with 50 or more shareholders and at least $20,000,000 of assets.

16. For the purposes of this paper the Commission is concerned with the parts of the Code that set out disclosure requirements that the offeror and target company must comply with. The full text of the Code is published on the website of the Takeovers Panel ("the Panel"), www.takeovers.govt.nz.

17. Under the Code the offeror is required to issue an information document about the offer to all shareholders in the target company, and the target company itself is required to issue a target company statement. The contents of the takeover offer document are specified in the Schedule 1 of the Code and must include information about:
    1. the offeror and its directors;

    2. the target company;

    3. the terms and conditions of the offer;

    4. the equity securities of the target company held or controlled by the offeror and people associated with it, and any person with more than 5% of the relevant class;

    5. the names of any persons who have agreed conditionally or unconditionally to accept the offer;

    6. arrangements by the offeror to pay the consideration, and a statement of the target company shareholders' rights if payment is not made;

    7. particulars of any arrangements between the offeror, and its associates, and the target company, or any related company, in connection with or in response to the offer;

    8. particulars of any arrangements between the offeror, and its associates, and the directors or senior officers of the target company, or any related company, in connection with or in response to the offer;

    9. particulars of any financial agreement or arrangement made under which the target company, or any related company, would directly or indirectly provide assistance for the offer;

    10. whether the offeror has reserved the right to acquire equity securities outside the terms of the offer in accordance with Rule 36 of the Code;

    11. a statement as to the likelihood of changes in the target company (unless the offer is conditional on acquiring over 90% acceptances, and the 90% condition cannot be waived);

    12. details of any pre-emption clauses in the target company's constitution affecting target company shareholders;

    13. details of any escalation clauses;

    14. an independent advisor's report (required where the offeror is seeking to acquire shares in two or more classes of target company shares, in order to confirm the fairness of the offer between the classes);

    15. details of securities offered (this topic is so important that it is discussed in more detail below); and

    16. a certificate signed by the offeror, or the offeror's directors, vouching for the contents of the takeover offer document.

18. The contents of the target company statement are set out in Schedule 2 of the Code and must include:
    1. the name and directors of the target company;

    2. the number, designation and percentage of shares in the target company held by its directors and senior officers and their associates, as well as details of any recent trading by these individuals or share issues to them over the last two years;

    3. the number, designation and percentage of shares in the target company held by any person holding more than 5% of the target company's shares;

    4. whether any director or senior officer of the target company, or any of their associates, have accepted the offer or intend to accept it;

    5. if the offeror is a company, details of any shares held in the offeror by the target company, or by the directors and senior officers of the target company and their associates, together with details of any recent trades;

    6. particulars of any arrangements between the offeror, and its associates, and the target company, or any related company, in connection with or in response to the offer;

    7. particulars of any arrangements between the offeror, and its associates, and the directors or senior officers of the target company, or any related company, in connection with or in response to the offer;

    8. a statement as to whether any director or senior officer, or associated person of a director or senior officer, or 5% shareholder has a material interest in any contract that offeror, or any related company of the offeror, is a party to;

    9. if the target company directors consider that any information in the takeover offer document is incorrect or misleading, any additional information that would remedy this;

    10. a recommendation from the directors whether target company shareholders should accept the offer, or a statement that the directors do not make a recommendation and their reasons for not making a recommendation;

    11. details of the equity securities of the target company;

    12. details of any agreement or arrangement entered into as a consequence, in response to, or in connection with, the takeover offer, and a statement whether there are any negotiations underway as a consequence of, in response to, or in connection with, the offer, that could lead to a merger, amalgamation, or reorganisation of the target company or its securities or assets;

    13. financial information on the target company;

    14. an independent advisor's statement on the merits of the takeover offer;

    15. details of any asset valuations in the target company statement;

    16. details of the assumptions behind any prospective financial information contained in the target company statement;

    17. details of the market performance of the target company's securities (if quoted), or any information the target company has regarding its trades (if not);

    18. any other information that could reasonably be expected to be material in an offeree's decision whether or not to accept the offer;

    19. a certificate signed by the target company's directors vouching for the contents of the target company statement.