Investors in New Zealand companies should be alert to proposed changes to the rules for takeovers and capital raising. These proposals follow a period of heightened activity in New Zealand’s capital markets in response to COVID-19. In this update, we summarise the key proposed changes, matters investors should be aware of, and the next steps for reform.
Changes to the scope of the takeover rules for New Zealand incorporated companies
The primary rules covering takeover activity in New Zealand are contained in the Takeovers Code. The Takeovers Code restricts investors and their associates from holding or controlling more than 20% of the voting rights in certain companies. The Takeovers Panel is the regulatory body responsible for administering the Takeovers Code and has recommended changes to address the scope of the Takeovers Code where a take- over occurs within 12 months after a company would otherwise cease to be subject to the Takeovers Code.
For listed companies, the recommended change is to remove the existing 12-month look back rule for companies that delist after a ‘take private’ transaction. Currently, a New Zealand incorporated company with financial products that confer voting rights quoted on the NZX Main Board (which is currently the only licensed market in New Zealand) is subject to the Takeovers Code for 12 months after delisting. This 12-month look back rule was intended as an anti-avoidance measure to stop listed companies from delisting and then immediately undertaking a control-change transaction. However, where a delisted company is privately owned by one or a small number of shareholders after delisting, giving effect to a Take- overs Code compliant sale can add material cost and delay to a transaction. Under the proposed changes, a company that is widely held may still remain subject to the Takeovers Code after delisting.
For unlisted companies, the recommended change is to introduce a 12-month look back rule such that the Takeovers Code applies for 12 months after the company drops below the size and shareholder thresholds for being subject to the Takeovers Code. The shareholder threshold is currently 50 shareholders and 50 share parcels. The size threshold for a company that has completed its first accounting period is at least NZ$30 million of assets or at least NZ$15 million of revenue (in each case, including assets and revenue of any subsidiaries). The recommendation was made in response to concerns that companies can restructure their shareholdings so that they cease to be subject to the Takeovers Code. For example, some companies have used a nominee that holds shares on trust for a number of beneficial owners, bringing the total number of shareholders and/or share parcels under 50. The Takeovers Panel has recommended that the proposed 12-month look back rule for an unlisted company may be opted out of if approved by 75% of the shareholders entitled to vote and voting, and a simple majority of the votes of those shareholders entitled to vote.
Offerors to be required to prove they have the resources to proceed with a takeover
The Takeovers Panel has recommended that offerors be required to have sufficient funding in place to meet their commitments under a takeover offer (and in respect of any liabilities incurred in respect of the offer) and must make specific disclosures regarding those funding arrangements. These recommendations follow concerns that a failure to complete a takeover offer would be a significant issue for the functioning of an efficient takeovers market, and would undermine confidence in the New Zealand market. The Takeovers Panel has observed that the New Zealand takeovers regime provides significantly less assurance to share- holders than other jurisdictions such as Australia and the United Kingdom.
In terms of the disclosures that would be required, it is proposed that the offer document must include a statement that the relevant funding is committed. Including the disclosure in the offer document is intended to ensure that shareholders are aware of financial risks, and that the persons who sign the offer document (e.g., directors) are at risk of personal liability if the statement is not correct.
Other less substantive changes to the rules for takeovers are also proposed. These relate to ensuring that shares acquired in a scheme of arrangement are acquired free of encumbrances, requiring disclosures for derivative interests, and dealing with unclaimed consideration as part of a takeover.