Objectives underpinning New Zealand takeover laws

New Zealand takeover laws govern changes of control of listed New Zealand companies and unlisted New Zealand companies with 50 or more shareholders and 50 or more share parcels.  A company of this type is called a Code Company.

New Zealand takeover laws are set out in the Takeovers Act, the Takeovers Code and the Companies Act.  The six objectives considered when the Takeovers Code was formulated relate to:

• the efficient allocation of resources;
• encouraging competition for control of Code Companies;
• fair treatment of shareholders;
• promoting international competitiveness of New Zealand’s capital markets;
• recognising that shareholders must ultimately decide for themselves the merits of a takeover offer; and
• maintaining a proper relation between the costs of Takeovers Code compliance and the benefits resulting from it.

The objectives of the Takeovers Code are embodied in the provisions of the Takeovers Code itself. The rules of the Takeovers Code allow for pause (ensuring shareholders have adequate time to make a decision about a takeover) and publicity (ensuring shareholders are adequately notified and informed about a takeover).

The rules of the Takeovers Code allow for pause and publicity.

The basic concepts

The Takeovers Code uses a number of basic concepts to apply the objectives underpinning New Zealand takeover laws.

20% rule – the fundamental rule

The ‘20% rule’ or the ‘fundamental rule’ is the first basic concept and the most important.

The 20% rule prohibits a person (including associates) from increasing their shareholding above 20% in a Code Company, except in accordance with the Takeovers Code.

Voting rights

The second basic concept is known as ‘voting rights’.

The Takeovers Code is concerned with shares that have voting rights attached to them, as those confer the ability to make certain decisions in respect of the Code Company.

Association

The third basic concept is known as ‘association’.

Associates are broadly persons who act together or are accustomed to act in accordance with each other or who have a relationship such that, under the circumstances, they should be regarded as associates of one another.

The concept of association is used when calculating voting rights.  For example, a shareholder must take into account the voting rights of its associates when determining its level of control in the Code Company.

Exceptions to the 20% rule

The basic concepts described above effectively force someone who wants to acquire control of the Code Company to only do so through one of a limited number of exceptions.  The three most common exceptions to the 20% rule are:

• a takeover offer (under the Takeovers Code);
• a scheme of arrangement (under the Companies Act); or
• an acquisition or allotment of shares approved by shareholders.

There are other exceptions to the 20% rule, including ‘creeping’ acquisitions of no more than 5% of the Code Company’s voting rights in a 12 month period in certain circumstances, and compulsory acquisition of the remaining shares in the Code Company, where the shareholder already has 90% or more of the voting rights in that Code Company.

Key features of a takeover offer

The takeover offer process is governed by the Takeovers Code and starts with the offeror giving notice to the prospective target company of its intention to make an offer for the Code Company.  This notice is called a ‘takeover notice’.

Under a takeover offer, the offeror makes an offer to all target shareholders to acquire all or some of their voting securities.

The offer must be on the same terms and provide the same offer price for all securities belonging to the same class.  If the target company has more than one class of securities, the offer price as between classes will usually differ to reflect the value of those different securities.  In such circumstances, the offer price must be fair and reasonable as between the different classes.

The offer is contained in a document that is sent to target shareholders called an ‘offer document’.

The offer document generally contains all information known to the offeror that is material to a target shareholder’s decision whether to accept the offer, as well as specified information including:

• information about the offeror;
• details of the offeror’s (and its associates’) ownership of equity securities in the target company (including details of any equity securities acquired or disposed of by the offeror (or its associates) in the 6 month period prior to the date of the offer);
• in most cases a statement of the offeror’s intentions about the Code Company;
• details of any target shareholders who have agreed to accept the offer; and
• details relating to the financing of the offer.

The target company must respond to the offer document in a document that is sent to the offeror (and in some cases to the NZX (if the company is listed) and the target’s shareholders) called a ‘target company statement’. The target company statement contains the target directors’ recommendation on whether to accept or reject the offer, and is required to contain or be accompanied by either a full independent adviser’s report on the merits of the offer, or a summary of that report with a full copy to be provided to shareholders on request.

Other key points relating to takeover offers include:

• the offer must be sent to shareholders during the period beginning 14 days, and ending 30 days, after the takeover notice is sent to the target company and no later than 3 days after the date of the offer;
• the offer price may consist of cash or shares in another company (or a combination of both or other financial products);
• the offer price may be increased after the offer is made and, if increased, those who have already accepted the offer are entitled to be paid the increased price;
• an offer can be made for a listed or un-listed Code Company;
• the offer can be subject to conditions, although some conditions are prohibited such as conditions within the control of the offeror. An offeror is also not allowed to let an offer lapse in unreasonable reliance on a condition of the offer (for example, a condition that requires the target company’s cooperation); and
• the offer period must generally be for a minimum of 30 days and a maximum of 90 days but may be extended in certain circumstances.  This is particularly important if there are any delays in obtaining regulatory approvals, for example, OIO consent.

Key features of a scheme of arrangement

Since legislative change in 2014 allowed schemes of arrangement to deal with control of Code Companies, schemes have become the most popular way to conduct friendly takeovers of Code Companies.  A scheme of arrangement is a statutory Court-approved procedure largely run by the Code Company and governed by the Companies Act, but still subject to the jurisdiction of the Takeovers Panel.

There are generally two stages to the court approval process for a scheme (initial orders and final orders).

Initial orders – the Court will usually make initial orders regarding the holding of a meeting or meetings of shareholders to consider and vote to approve the scheme, including an order requiring scheme documents for the proposed scheme be prepared and supplied to shareholders.

Final orders – the Court may make final orders approving the scheme if:

• the target company shareholders have approved the scheme by:
  • resolution approved by 75% of the votes in each interest class[1]; and
  • resolution approved by a simple majority of all votes on issue (whether voted or not); and
• either of the following applies:
  • the Court is satisfied that shareholders will not be adversely affected by the change of control of voting rights being undertaken under the Companies Act rather than the Takeovers Code; or
  • the scheme promoter has filed a no-objection statement from the Takeovers Panel.

Scheme documents (including the notice of meeting) setting out the details of the scheme are usually prepared and provided to the Court in draft form at the first court hearing for the initial orders.  The scheme documents will typically contain information that would usually be required to be disclosed to shareholders under the Takeovers Code and will typically include an independent adviser’s report on the merits of the scheme.

The Takeovers Panel views schemes as a legitimate and valuable means for undertaking corporate transactions in New Zealand.  The Takeovers Panel has an enhanced role in a scheme as it can issue a statement that it has no-objections to the scheme.  The Takeovers Panel will review scheme documents in draft to check whether it considers shareholders have adequate information and protections under the scheme.  It is important to engage with the Takeovers Panel early if a takeover by way of a scheme is proposed to be undertaken.

Once the scheme documents are sent to shareholders, the meeting is held and shareholders will vote on the resolutions.

If shareholders approve the scheme and it is otherwise unconditional, the scheme promoter will then seek the final court orders approving the scheme, following which the scheme is implemented by, for example, the transfer of all the shares to the offeror in return for consideration.

Other key features of a scheme include:

• a scheme has an ‘all or nothing’ outcome, meaning that the offeror has certainty that it will either achieve its proposed outcome if the scheme is approved or not acquire any shares if the scheme is not approved;
• the voting approval thresholds for a scheme are generally considered lower than the 90% threshold required under a takeover offer in order to trigger compulsory acquisition (and therefore acquire 100% ownership), but this depends largely on the shareholder register and the ability to meet the 2 different thresholds required in a scheme;
• a scheme is a target-driven process requiring the co-operation of the target, it is generally only suitable for a ‘friendly’ acquisition of a target company;
• a scheme can be used to acquire a listed or un-listed Code Company;
• a scheme is subject to fewer prescriptive rules than a takeover offer, allowing greater flexibility to include ancillary features such as asset transfers and capital injections or reductions, or to treat different target shareholders differently (but this may give rise to separate interest classes in voting to approve the scheme and is uncommon);
• it is more difficult to make changes to the terms of a scheme (such as increasing the consideration in response to a rival offer) than under a takeover offer. Changes in the terms of a scheme will generally require Court approval, an adjournment of the scheme meeting, and supplementary disclosures;
• the scheme promoter and its associates will vote in a separate interest class from the other shareholders; and
• if the offeror already holds a large percentage of target shares, this may be a disadvantage under a scheme because those shares will be voted under a separate interest class and this will therefore enlarge the effective vote of all the other target shareholders on the scheme resolution, potentially making it more difficult to pass the requisite majorities.

Since the law change in 2014, there have been 19 successful full takeovers and four of those were undertaken by way of scheme of arrangement.


Since the law change in 2014, there have been 19 successful full takeovers and four of those were undertaken by way of scheme of arrangement. The most recent being the CITIC Capital acquisition of 100% of the shares in Trilogy International, where the MinterEllisonRuddWatts team advised the successful buyer.

Footnote

[1] An interest class is broadly a group of shareholders with similar interests in the Code Company.