Proposed Class Exemption For Prof. Underwriters
19 February 2004
Proposed Class Exemption For Professional Underwriters
REQUEST FOR COMMENTS
The Panel is seeking submissions on the proposed replacement of the exemption for underwriters contained in the Takeovers Code (Class Exemptions) Notice (No.2) 2001.
Details of the current exemption and the proposed replacement exemption are set out below.
Exemption for Underwriters
Underwriting arrangements are an accepted means of assisting companies to raise capital in New Zealand. However, if an underwriter is required to take up a significant amount of securities pursuant to an underwriting agreement it could (when combined with any existing shareholding of itself or its associates) become the holder or controller of more than 20% of the voting rights in a code company.
When the Code was introduced the Panel recognised the need to facilitate the use of underwriting arrangements in certain circumstances and considered that it would be appropriate to exempt professional underwriters from the fundamental rule in respect of any increase in their percentage of voting rights resulting from the fulfilment of obligations under a bona fide underwriting arrangement. The Panel considered that such an exemption would be consistent with the Code provided that:
- any increase in voting control was eliminated (wholly or, in some cases, in part only) within 6 months; and
- the additional voting rights were not exercised before that elimination.
The exemption granted to underwriters is contained in clause 19 of the Takeovers Code (Class Exemptions) Notice (No.2) 2001.
Review of the Exemption for Underwriters
As part of its function to keep the law relating to takeovers under review the Panel has been considering the continued appropriateness and effectiveness of the existing exemption for underwriters.
The existing class exemption was aimed at “professional” underwriters because the motivation of professional underwriters would be to obtain an underwriting fee in return for a commitment to take-up any shortfall in subscriptions to a new issue or a rights issue. It would not be to hold voting rights in a code company on a long term basis.
The Panel considers that there is a risk not adequately addressed by the terms of the existing exemption notice that corporate investors and their associates may subvert the policy behind the Code by using an underwriting commitment to increase their control in a code company.
Consequently, the Panel has decided that the class exemption for underwriters should be more restrictive than at present and should not apply if the underwriter has a collateral intention of using the underwriting agreement to increase the underwriter’s (or its associates’) voting control in a code company. Such an intention may be evidenced if the underwriter has previously expressed an intention to increase its control percentage in that code company.
The Panel has also been reconsidering the availability of the exemption to underwriters who already hold or control voting rights in the relevant code company.
The exemption currently applies to underwriters who hold or control voting rights provided that the underwriter otherwise meets the criteria of the exemption. However, where underwriters and their associates already hold shares in the code company, there is a risk that the underwriter or its associates may have the purpose or intent of increasing their voting power in that company. Their shareholding already demonstrates that their interest in the company is not just as an underwriter, but as an investor.
Accordingly, the Panel considers that it is also desirable to amend the exemption to underwriters so that it is not available to an underwriter who is, or who when aggregated with its associates would be, a substantial security holder of voting rights in the code company.
As a consequence, in those situations where a code company is contemplating making a rights issue to existing shareholders, and of having that issue underwritten by a professional underwriter (possibly with sub-underwriters), and the professional underwriter has a purpose or intent of increasing its level of control or is a substantial shareholder in the code company, then the code company and the underwriter would have to apply to the Panel for a specific exemption. Alternatively, shareholder approval under rule 7(d) of the Code could be sought, provided that an appropriate exemption from rule 16(b) of the Code is first obtained.
This would give the Panel the opportunity to be satisfied on the merits of the application and also to determine whether, to ensure consistency with the objectives of the Code, the conditions should differ from the class exemption, for example by providing a more restricted sell-down period.
The Panel proposes to amend the notice so that the exemption will apply only if:
- the purpose of the underwriter’s entry into the underwriting or subunderwriting contract was to earn fees, commission or similar remuneration; and
- neither the underwriter nor any upstream party of the underwriter had a collateral purpose or intention, in respect of the underwriter’s entry into the underwriting or subunderwriting contract, of enabling any person to increase that person’s voting control; and
- immediately before the underwriter’s entry into the underwriting or subunderwriting contract, the aggregate of the control percentages of the person and the person’s associates did not exceed 5%.
A draft exemption notice in respect of underwriters is attached.
Request for comments
As the proposed amendment relates to a class exemption the Panel seeks comments from the public on its intention to replace the existing exemption for underwriters contained in the Takeover Code (Class Exemptions) Notice (No.2) 2001.
Submissions must be received by Friday 19 March 2003. Submissions may be sent to the Takeovers Panel, by post, fax or email for the attention of Marion Hemphill (firstname.lastname@example.org).