The Takeovers Panel has granted a class exemption allowing small code companies to issue new shares without needing to observe the so called 20% “no fly zone” provided for in the Takeovers Code’s fundamental rule.
The exemption is intended to reduce what the Takeovers Panel considers are “disproportionate cost barriers to capital-raising” for the small code company (unlisted, with $20 million or less in total assets, on a group basis).
Chapman Tripp supports the move but considers that the same logic should be applied to acquisitions involving small code companies. New Zealand’s growing number of crowd-funded companies, in particular, would benefit were the Panel to take a more liberal approach.
The new exemption permits small code companies to issue new shares where the issue would otherwise require shareholder approval due to it breaching Rule 6(1), the Code’s fundamental rule.
The fundamental rule prohibits a person, together with his or her associates, from holding or controlling more than 20% of the voting rights in a code company, except where permitted under the Code (e.g. through a takeover offer or with prior shareholder approval).
The exemption would permit, for example, a shareholder holding 19% of the voting shares in a small code company to be issued voting shares taking their aggregate holding to 25% without the need for prior shareholder approval (as would be required in the absence of the exemption).
The exemption is subject to a number of conditions, including:
- the company’s board must have previously resolved:
- to opt out of the Code in respect of the relevant issue, and
- that it considers that it is in the best interests of the company to do so
- within 28 days of the board resolution, a disclosure document (of not more than two A4 pages and containing certain prescribed information) must be sent to the Panel and to each holder of voting securities in the company
- during a minimum 21 day objection period starting on the date the disclosure document is sent to shareholders, written notices objecting to the opt out must not have been received from the holders of 5% or more of the company’s free float (being all the company’s voting securities, less those held by the person to whom the new shares are proposed to be issued and their associates), and
- the issue must be made after the end of the objection period and within 90 days of the board resolution (but if the board ceases to consider the opt out to be in the best interests of the company the issue must not proceed).
Chapman Tripp comments
We welcome the new exemption, which should have the desired effect of reducing the cost of capital raising for small code companies. The need to prepare a disclosure document, and the minimum 21-day objection period, will still limit these companies’ ability to move quickly to raise new capital - which may be critical in distress situations. But it is unsurprising that the Panel has insisted on these safeguards.
However, we are disappointed that the Panel has not gone further and also exempted acquisitions and buybacks from compliance with the fundamental rule. We argued for this outcome in our submission to the Panel concerning the new exemption.
The exemption does effectively permit some change of control transactions to proceed without needing to comply with the Code, through the issue of new voting shares. In our view, other transactions which also effect changes of control, such as acquisitions, should be similarly exempted.
We suggest that the Panel not stop here, but that it promptly investigate (and consult further on) extending the exemption to other control transactions (particularly acquisitions and buybacks).
In the meantime, we expect that many small code companies, and particularly crowd-funded code companies, will continue to avoid application of the Code to non-exempted transactions through the use of non-voting shares or nominee structures.
From a policy perspective this is a sub-optimal outcome, depriving shareholders of the protections afforded by the Code (even as modified by the new exemption), particularly for more transformative events such as a full takeover offer, while encouraging artificial structuring that may not be in the long-term interests of New Zealand’s capital markets.
In short: a good first step, but hopefully not the last.