The Ministry of Economic Development has released the Cabinet Paper and Regulatory Impact Statement for the Proposed Unsolicited Offer Regulations ("Regulations") under the Securities Markets Act 1988 ("Act"). As yet the draft regulations have not been made public. The regulations come following last year's amendment to the Act to provide a regulation-making power in relation to unsolicited offers.
These papers reveal the government's proposal will outline:
- the scope of what constitutes an unsolicited offers (defining the meaning of unsolicited and including offers for listed and unlisted securities);
- the content which an offeror will be required to disclose to an offeree;
- disclosure of the unsolicited offer documents to the issuer;
- a 30 day minimum offer period;
- a right of return or "cooling off period" for offerees; and
- rights and remedies available to offerees.
As proposed, the Regulations do raise some potential problems which will be discussed in greater detail below. In summary these are in relation to the proposed process and the scope of what is covered by the definition of an "unsolicited offer".
In the last couple of years, a number of high profile "low-ball offers" made by Bernard Whimp brought the issue of unsolicited offers to the attention of the Securities Commission (and now the FMA).
There were a number of concerns with the way in which these unsolicited offers were made. In particular, there was a the lack of information provided in making the offer; the terms of the offer were not transparent (such as payment being deferred over time); the timeframes in which to accept the offer gave many shareholders a sense of urgency in decision making; and they tended to target shareholders with limited financial literacy skills.
The FMA's ability to intervene in relation to unsolicited offers is currently limited to reactive measures, such as issuing warning notices and requiring offerors to include disclosure notices when making an offer. The purpose of the regulations is to set some limits around the process and requirements when making unsolicited offers.
Overview of the regulations
The Government indicates that the Regulations will focus on four key areas. These are summarised below.
The scope of unsolicited offers
It is intended that the meaning of "unsolicited" will be clarified and will apply to situations where there has been no consent to receive an offer. It will apply to both explicit offers as well as invitations to treat and include offers made by associated persons.
Form and content
The regulations will stipulate minimum information material which must be included at the beginning of any unsolicited offer document. The following information will be required:
- the name and address of the offeror;
- the date of the offer;
- the price of a listed security or, for a non-listed security, a fair estimate of the value of the security and the basis for making that estimate;
- information about how to find out the current price of the securities;
- the price at which the offeror wishes to purchase the securities;
- the terms of payment;
- a recommendation to seek independent financial/legal advice;
- the terms of acceptance (including the right of return, discussed below);
- an explanation of rights and remedies (including the ability to cancel, discussed below); and
- information on how to find a stockbroker.
The proposal outlines what may be quite onerous process requirements. It requires that offers must remain open for a minimum of 30 days from the date of the offer. This is designed to ensure offerees do not feel pressured into making an urgent decision. In addition to the 30 day period, the offeror has an unconditional right of return (a "cooling off period") within 10 working days of the date of acceptance.
The offeror must send a copy of the unsolicited offer documentation (discussed above) to the issuer for their information.
It was felt that there was a risk that offerees may be confused if an unsolicited offer was able to be varied. As a result, no variation or correction of the unsolicited offer document is permitted. Only with FMA consent can the offeror withdraw the offer and a new offer be made. An offeror will not be able to contract out of the regulations.
Rights and remedies
The Regulations will set out a number of obligations. These obligations essentially require the offeror to meet the information and process requirements. Additionally, the offeror must pay for the security within the time frame set down in the agreement and, where the seller wishes to cancel the agreement, transfer the security back to the offeree within a reasonable time period.
Additionally, it will be an obligation that unsolicited offer documents are not confusing, misleading or deceptive and allow the FMA to take immediate action under the Act as well as in court.
We note that the process requirements, whereby the offer must be open for 30 days and the 10 day "cooling off period", effectively gives the offeree six weeks in which decide to accept the offer. This time period seem overly lengthy. In this time the offeree can watch markets trends before deciding whether to sell the shares. That is, the offerees effectively receive a put option, given that the offeror cannot freely withdraw their offer without FMA approval.
The regulations essentially provide a regime to regulate offers, which are otherwise exempt from the provisions of the Takeovers Code. It would seem that, in respect of the right to withdraw acceptance during the "cooling off period", this regime in fact requires more than the Takeovers Code.
In conclusion, what has been suggested appears one-sided and unfair to offerors, resulting from a knee-jerk reaction to one particular offeror. If the regulations come into force as described, they are likely to curtail unsolicited offers being made. That would be to the detriment of the New Zealand capital markets.