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New Zealand: Proposed Changes to Rules for Takeovers and Capital Raising

David James Quigg, Matt Woolley, and Asha Stewart

New Zealand: Proposed Changes to Rules for Takeovers and Capital Raising WONG

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.

Changes to rules for capital raising to better facilitate SPACs and dual class companies

The NZX Listing Rules outline minimum requirements for publicly listed companies on New Zealand’s primary exchange. A range of structures can be used by such companies to raise capital. The NZX is seeking feed- back on whether to introduce specific investor protections to facilitate special purpose acquisition company (“SPAC”) listings and dual class listings.

While SPACs represent a significant number of new listings for some markets (e.g., 59% of all new listing on Nasdaq in 2021), New Zealand has not seen a strong demand from promoters of SPAC listings. SPAC listings are currently possible on the NZX, but there is no specific regulatory framework or bespoke investor protections for SPAC listings. To facilitate SPACs be- ing successful in the New Zealand market, the NZX is seeking feedback on the types of investor protections that are needed. For example, the NZX has noted that:

(i) Under Nasdaq and NYSE requirements, at least 90% of the funds raised from the initial public offering must remain deposited in an escrow account and applied only to specified purposes. New Zealand has no such rules.

(ii) In certain circumstances, the United States al- lows for the board of directors to approve the business combination by the SPAC without approval in a shareholder(s) meeting. Shareholder(s) approval would likely be required in New Zealand if the business combination is considered to be a “major transaction”.

The current NZX Listing Rules permit dual class shares (i.e., a company with two share classes on issue) only on a case-by-case basis. Typically, one class is offered to the public, while the other is offered to the company founders, executives and family. The class offered to the general public might have limited or even no voting rights, while the class available to founders and executives has more voting power. Other markets have specific regimes in place in relation to the listing of issuers with dual class share structures. For example, dual class structures are permitted on the NYSE and Nasdaq, and more recently the SGX and HKeX amended their rules to permit such structures. Exchanges that permit dual class listings often include restrictions on the exercise of superior voting rights, such as an overall limit on the proportion of superior voting rights and clear exit and transfer provisions for superior voting rights. We expect the NZX will receive a range of views on this issue given that it involves moving away from the ‘one share, one vote’ principle.

In addition to the SPAC and dual class companies changes noted above, the NZX is seeking feedback on various changes to the capital raising rules relating to accelerated non-renouncement entitlement offers, share purchase plans and underwriting arrangements.

Next steps for proposed changes

Most of the changes to the rules for takeovers can be implemented by regulation and therefore, if accepted by the Minister of Commerce and Consumer Affairs, are expected to be implemented relatively quickly. A small number of the recommendations would require legislative amendments, meaning those changes are unlikely to be implemented in the short term.

The closing date for submissions on the NZX Listing Rules proposals was September 2, 2022. Following that, it is expected that the NZX will seek formal approval from the Financial Markets Authority for the proposed changes and would then seek to implement the changes before the end of 2022.

This article was prepared by the Business Law Section's Mergers & Acquisitions Committee.