Takeovers Panel consultation on dealing with upstream acquisitions

The problem

At the heart of the Panel’s concerns is that the current rules allow for target companies to use downstream holdings in Code companies to make themselves virtually “takeover proof”.  This situation arises because an upstream acquisition cannot take place other than by way of an offer to all shareholders of the Code company unless, in advance of gaining control of the upstream target company, either:

• The Panel grants the acquirer an exemption from rule 6(1) of the Code
• The shareholders of the Code company vote in favour of the acquisition (which may be unlikely in the context of a hostile takeover).

This issue was most recently highlighted in the context of BG Group plc’s proposed takeover of the Australian listed energy company Origin Energy, where Origin was a major shareholder in NZX listed Contact Energy.

In an attempt to offer potential alternative options to the current regime, the consultation paper compares how other legal jurisdictions deal with upstream acquisitions (particularly Australia) and concludes that:

“It does not appear to be appropriate to maintain the status quo.  New Zealand is out of step with other countries in this area, including with our closest significant neighbour, Australia.”

Possible solutions

The alternative options suggested for discussion by the Panel can be summarised as follows:

Class exemption with a focus on the purpose and value tests

This option follows the UK approach and proposes to introduce a class exemption for upstream acquisitions unless:

• One of the main purposes for the upstream acquisition is to secure control of the Code company or
• The value of the shares in the Code company is “significant” in relation to the upstream company.  In this regard, the Panel has suggested that an asset threshold of either 25% or 50% should apply to the value test.

Another alternative limb to this option suggested in the Paper is that the exemption could be restricted to apply only where the upstream transaction occurs in a jurisdiction with investor protections comparable to those in New Zealand. The “reputable jurisdiction requirement” is used in Australia and seems to be favoured by the Panel as providing an appropriate balance between investor protection and consistency with the international approach to this issue.

Complete exemption subject to reputable jurisdiction requirement

This proposal would provide a complete exemption for acquisitions that result from an upstream acquisition in an entity listed on an approved stock exchange.  In response to the concern that this blanket approach would not afford the Panel any powers to prevent takeovers where the purpose is clearly to take control of the downstream company or where the value of the downstream company comprises a significant part of the assets of the upstream target company, the consultation paper suggests that the Panel could have the power to intervene for “unacceptable circumstances”.  Although this approach would be consistent with the Australian approach, the disadvantage is that it could create a degree of transaction uncertainty by giving the Panel a broad discretion to intervene.

Submissions

The Panel has invited submissions on the consultation paper and has included a questionnaire as a guide.  The closing date for submissions is 12 June 2009 and a copy of the Paper can be found here.

If you or your organisation would like to make submissions and require guidance as to the process or content of those submissions, please contact one of our lawyers listed below.

This article has been prepared for information purposes only and not as legal advice.  For further information, please contact Sacha Judd or Ash Hill.