Truth in takeovers: market participants should prepare for a more rigorous approach

The Takeovers Panel will have new powers to deal with misleading or deceptive conduct in relation to Takeovers Code-regulated transactions when the new provisions in the Takeovers Act and Rule 64 of the Takeovers Code come into force on 29 February. In this article partner Glenn Joblin and solicitor Tony Dunn review the new provisions and highlight what can be expected from the Takeovers Panel in light of its recent policy announcements on the new law.

Background

The 2006 Securities Legislation Bill included a number of changes to the Takeovers Act and Takeovers Code. Most of these came into effect after the Bill's assent in October 2006. The most significant amendments to the Takeovers Act and the Takeovers Code to arise out of the Bill are new provisions which introduce market manipulation prohibitions in relation to takeovers. These amendments come into force on 29 February 2008.

The amendments are a direct response to the Takeovers Panel's calls to government for additional powers to respond to allegations of misleading conduct in relation to takeovers.

The new provisions, which in equivalent Australian legislation are commonly known as "truth in takeovers" provisions, are broad and will cover communications outside the formal offer document and target company statements, including newspaper advertising campaigns and letters sent to shareholders directly. The provisions will provide additional scope for those involved in hostile or contested takeovers to complain about the conduct of other parties.

The key changes are set out in section 44B of the Takeovers Act and Rule 64 of the Takeovers Code.

Section 44B

Under section 44B of the Takeovers Act a person must not make a statement or disseminate information in relation to any transaction or event regulated by the Takeovers Code if:

• a material aspect of the statement or information is false or the statement or information is materially misleading; and

• the statement or information is likely to:

• induce a person to trade, or hold the securities; or

• have the effect of increasing, reducing, maintaining or stabilising the price for trading of the securities; or

• induce a person to vote for, vote against, or abstain from voting in respect of a transaction that is or is likely to be regulated by the Takeovers Code.

A person or company who contravenes section 44B can be held criminally liable if they have actual knowledge that the statement or information is false in a material aspect or is materially misleading.

Rule 64

The Takeovers Panel's ability to address misleading conduct has in the past been limited to situations where an offer document or target company statement is misleading. Rule 64 of the Takeovers Code extends the Takeovers Panel's jurisdiction to any conduct concerning a Takeovers Code-regulated transaction or event.

Under Rule 64, a person must not engage in conduct that is:

• conduct in relation to any transaction or event that is regulated by the Takeovers Code and misleading or deceptive or likely to mislead or deceive; or

• incidental or preliminary to a transaction or event that is or is likely to be regulated by the Takeovers Code and misleading or deceptive or likely to mislead or deceive.

In essence, Rule 64 has imported section 9 of the Fair Trading Act 1986 (which prohibits misleading and deceptive conduct in trade) into the Takeovers Code. As a consequence, the Fair Trading Act will not apply to conduct regulated by the Takeovers Code.

In most situations, complaints in relation to a breach of Rule 64 will relate to written or oral statements. However, Rule 64 relates to "conduct" and therefore not only to statements or representations. The Takeovers Panel may be able to regard conduct, such as trading in shares, as being misleading or deceptive in certain circumstances.

Rule 64 applies to conduct by any person, not just bidders or target companies or major shareholders.

Rule 64(2) allows the Takeovers Panel to take action in advance of Takeovers Code–regulated transactions or events. For example, the Takeovers Panel may require correcting information to be issued before a formal takeover offer is made or that a notice of meeting be changed before it is sent to shareholders.

Takeovers Panel's policy position on new law provided in Code Word 22

In preparation for the implementation of the new regime, the Takeovers Panel has provided some early clarification on its interpretation of, and its intended approach to, the new "truth in takeovers" provisions in issue 22 of its periodic publication, Code Word.

For the most part, the Takeovers Panel has drawn on the detailed policies developed by the Australian Takeovers Panel and the Australian Securities and Investments Commission in relation to Australia's truth in takeovers provisions. It has also drawn on New Zealand case law dealing with section 9 of the Fair Trading Act. Particular mention is made of:

• how the Takeovers Panel intends to construe the meaning of misleading or deceptive conduct;

• how the Takeovers Panel will deal with "last and final statements";

• the likely manner in which the Takeovers Panel will use its new enforcement powers; and

• how the Takeovers Panel intends to control the provisions being used by some as a tactical measure against their opponents.

Meaning of misleading or deceptive conduct

The Takeovers Panel has given some guidance as to how it will interpret the expression "misleading or deceptive". The Takeovers Panel has stated that its interpretation will be consistent with pronouncements of the New Zealand and Australian courts and it will consider Takeovers Code-regulated conduct to be "misleading" or "deceptive" if it leads, or will be likely to lead, a person into error.

Last and final statements

The parties to a takeover offer are often asked to comment on their intended actions, and in some cases, a bidder will make a statement that it will not increase the offer price or extend the offer period. These announcements, commonly referred to as "last and final statements", can influence the actions of the directors or shareholders of the target company. The Takeovers Panel has indicated that even statements of a party's present intentions may be regarded as "last and final statements." For example, a bidder who states that it has "no intention to increase its offer price" may be regarded by the Panel as having acted in a misleading and deceptive manner if it does subsequently increase its offer price. That interpretation is at odds with ordinary legal principles where a statement of present intention would not be considered misleading if it was the party's genuine intention at the time the statement was made.

A recent example of a regulator enforcing the "truth in takeovers" principles in relation to "last and final statements" is the Australian Takeover Panel's decision in relation to the successful Australian takeover offer of Rinker Group Limited by CEMEX.

During its takeover bid for Rinker, CEMEX made a public announcement on 10 April 2007 that its offer price at that point was its best and final offer in the absence of a superior proposal. On 7 May 2007 however, CEMEX announced that Rinker shareholders that accept the offer could retain a final dividend that had been announced by Rinker in the interim, effectively increasing the offer price per share.

The Australian Takeovers Panel found that CEMEX's 7 May announcement resiled from the 10 April announcement and therefore, in the time between the two announcements:

• the acquisition of Rinker shares did not take place in an efficient, competitive and informed market;

• Rinker shareholders and the market were entitled to assume that there would be no other improvements to the offer after 10 April;

• Rinker shareholders and the directors of Rinker were not given enough information to enable them to assess the merits of the offer; and

• Rinker shareholders who sold shares on market after the 10 April announcement and before the 7 May announcement did not have an equal opportunity to share in the benefits flowing from the offer (i.e., the effective increase in the offer arising from the dividend).

CEMEX was ordered to pay the amount of the final dividend per share to Rinker shareholders who sold their shares in the period between the two announcements.

A similar outcome could arise under New Zealand's new provisions. The Takeovers Panel has stated that a departure from an unqualified "last and final statement" is likely to be seen as misleading or deceptive conduct. Furthermore, the Takeovers Panel has stated that it intends to "rigorously enforce" the prohibition against misleading or deceptive conduct and the Takeovers Panel has new enforcement powers to carry this out.

The Takeovers Panel has stated that there is scope to preserve the right to depart from a "last and final statement" by making a clear and unequivocal qualification when the statement is made. The Takeovers Panel, in Code Word 22, considers that an example of a clearly qualified statement would be:

• "At present [Offeror Ltd] does not intend to increase the offer price, but it reserves the right to do so."

The Takeovers Panel has stated that, as a matter of practice, it intends to write to each party who makes a "last and final statement" at the time of publication or when the statement is drawn to the Takeovers Panel's attention. The person will be put on notice that unqualified statements must be adhered to. If the statement is unqualified, the Takeovers Panel will ask whether an unqualified statement is what was really intended. If it was not intended to be an unqualified statement, the person will be invited to promptly publish a qualification to the statement. If the statement is equivocally qualified, the Takeovers Panel will invite the person to clarify their position to the market and to the Takeovers Panel immediately.

Enforcement provisions

Permanent compliance orders

The Takeovers Panel will be able to issue permanent compliance orders to deal with misleading conduct (section 33AA of the Takeovers Act).

Permanent compliance orders will enable the Takeovers Panel to prohibit or restrict persons from making statements or distributing documents, and to direct persons to disclose information or to publish, at the person's own expense, corrective statements. The power to grant permanent compliance orders will allow the Takeovers Panel to achieve by enforceable orders what it can often, but not always, accomplish with co-operation from the party who has breached the Takeovers Code.

The changes to the Takeovers Act also allow the Takeovers Panel to issue compliance orders in respect of any secondary involvement in a breach or contravention of the Takeovers Code (for example, against a person who has aided or abetted or induced any other person to contravene the Takeovers Code). Previously, the Takeovers Panel could only take action against the person or persons breaching the Takeovers Code.

Pecuniary penalties

The High Court can order civil remedies for a contravention of the Takeovers Code, including a compensatory order or pecuniary penalty order. The Takeovers Panel has indicated that it may apply to the court for a pecuniary penalty order if a person is found to have deliberately mislead or deceived market participants. The maximum pecuniary penalty is $500,000 for an individual or $5,000,000 for a body corporate, for each contravention.

Takeovers Panel may apply threshold tests

The Takeovers Panel has identified the possibility that its resources may be wasted dealing with tactical or vexatious complaints in relation to misleading or deceptive conduct. It has noted in Code Word 22 that the Takeovers Panel may apply threshold tests to decide whether to act on a complaint about misleading or deceptive conduct. A complainant may be required to show that it has a prima facie case, or that the complaint is not vexatious, or establish that there would be sufficient merit in having the Takeovers Panel investigate their complaint.

A final warning - no intention required

Market participants will already be aware of the need to take care if they make any representations to the media or the market in relation to a takeover. However, this will be even more important when Rule 64 is operative.

No element of intention to mislead or deceive is required for conduct to be in breach of the Rule. Conduct that unintentionally leads a person into error may still be a breach of the Takeovers Code.

It is clear that market participants will need to closely scrutinise all media statements and other communications issued in relation to a takeover or other Takeovers Code-regulated transaction.

For full details of the Takeovers Panel's intended approach to the new law read Code Word 22 on the Panel's website (www.takeovers.govt.nz) or click here.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.