Paul Swain Speech -The New Zealand Takeovers Code
14 March 2002 - 0900 Speech Notes
Butterworths "The New Zealand Takeovers Code in 2002 - Sinclair Room, Quay West Suites, 8 Albert Street, Auckland.
Good morning and thank you for the invitation to speak to you today.
I would like to take this opportunity to outline to you the Government’s direction of current and future reform for New Zealand’s securities markets and the part the Takeovers Code has played in that reform.
To do this I’d like to start with a look at the key drivers influencing New Zealand’s economy, and more specifically, our capital markets.
Strong public securities markets facilitate economic growth. Markets provide a mechanism for companies to raise capital, resulting in countries achieving higher economic growth in a number of different ways.
For example: countries can rely more on equity and long term debt financing, and less on bank loans and short term debt. Foreign capital inflows can support domestic growth, as securities markets allow the inflow of a channel of portfolio investment, which increases total capital flows.
Markets involve investors paying significant amounts of money to strangers for intangible rights, whose value depends entirely on the quality of the information that the investors receive and on the sellers’ honesty.
For a strong securities market we need appropriate rules to make sure of the integrity of information and the seller’s honesty, as well as strong institutions to enforce the rules.
For this reason the government believes it is important that there is a robust and effective regulatory framework to increase confidence and participation in the New Zealand securities market.
To achieve this we have set a number of priorities for businesses and securities markets, including:
- Making sure businesses in New Zealand have access to the capital needed to achieve growth and, that the cost of capital is kept as low as possible;
- Making sure there are robust financial market institutions, such as securities exchanges, brokers and advisors and effective regulatory bodies; and
- Making sure there is a favourable environment for investors.
To achieve this the Government has put in place a three-part reform package of securities law. This includes:
- The introduction of a Takeovers Code;
- The introduction of the Securities Markets and Institutions Bill; and
- A fundamental review of securities trading laws.
The first part of this law reform package was completed with the introduction of the Takeovers Code on 1 July last year. The introduction of the code marked a milestone for New Zealand securities laws.
The intention of the Code is to align our takeovers regime with international best practice. It seeks to give greater confidence to small and minority investors by providing them with fair equal treatment and participation in takeover situations.
Other key objectives include:
- Providing a transparent and orderly process which ultimately reduces transaction costs to domestic and international investors. This increases the ability of New Zealand’s sharemarket to be internationally competitive;
- Providing an effective supervisory enforcement body that operates within statutory guidelines; and
- Providing a takeovers regime which is similar to other jurisdictions, thereby creating greater confidence for international investors in the integrity of our market.
The code does this by prohibiting a person from increasing their voting rights in a code company above the 20% threshold except in compliance with the takeovers code.
There are six ways for a person to increase their voting rights above the 20% threshold:
- With the approval of shareholders;
- By a full offer to all shareholders at the same price;
- By a partial offer (an offer for a certain percentage of the total company) to all shareholders at the same price;
- By creeping acquisitions in the 50% to 90% range at a rate of 5% per annum
- In the 90% to 100% range by a compulsory acquisition (i.e. once a person holds or controls more than 90% of a company that person is entitled to and can be required by other shareholders to acquire all of the outstanding securities;
- Or under an exemption from the panel.
Although the Code allows full and partial offers, anyone wishing to move beyond the 20% threshold must obtain 50% of the company for their offer to become unconditional. A partial offer for a smaller holding is permitted with shareholder approval.
In the short time it has been in force, we believe the Takeovers Code has achieved many of these objectives. Industry feedback on the effectiveness of the code since its implementation has been generally very supportive. In fact many who were originally opposed to the implementation of a Takeovers Code, are now supportive of the current regime.
Incidents such as the Lion Nathan takeover of Montana Wines have illustrated how the Code has provided a more transparent and certain process in takeover situations. The Takeovers Panel, through their immediate reaction and resolution of the Montana takeover situation proved very effective in enforcing the Code.
All prospective takeover offers must now comply with the code and adhere to its core concepts of fair equal treatment and participation of all shareholders.
By requiring an offer to remain open for a specified period and to all shareholders equally, the Code has removed some of the urgency seen in takeovers of old, where shareholders were coerced by brokers into selling out at a lightning pace for fear of missing out on the deal.
Shareholders, led by fund managers, are now taking the time to consider offers and wait for competing bids to emerge.
Edison Mission’s bid for Contact Energy is a good example. Edison was forced to up its offer and extend the deadline on acceptances in the face of strong opposition to its bid. Although unsuccessful, it is a good example of the new regime’s requirement to treat all shareholders fairly and equally.
We are confident that perceptions of the New Zealand market in relation to takeovers have been greatly improved since the introduction of the Code.
Securities Markets and Institutions Bill (SMI Bill)
The implementation of the Takeovers Code is only the beginning of the government’s securities law reform program. The second stage is well underway with the Securities Markets and Institutions Bill before the Finance and Expenditure Select Committee and due to be reported back at the beginning of June.
The purpose of the SMI Bill is to increase public confidence in the effectiveness and the efficiency of the law and the institutions that support the securities markets. In order to achieve this the Bill:
- Places obligations on directors and officers to disclose securities dealings at the time they occur;
- Implements a statutory continuous disclosure regime;
- Implements a mechanism for mutual and unilateral recognition of overseas offering documents;
- Sets up the Commission as a civil public enforcement agency for insider trading;
- Gives the Commission and Panel additional powers so as to increase their effectiveness and flexibility in exercising their monitoring and enforcement powers;
- Gives the Commission additional supervisory powers over securities exchanges which will signal to the market that there is an effective co-regulatory system for securities exchanges in NZ. This includes a rule approval structure and ownership cap on securities exchanges to make sure of an adequate regulatory structure for any new exchanges that operate in the New Zealand market. The approval structure and ownership cap reflect the approval structure and ownership cap on the NZSE that was introduced during consideration of the New Zealand Stock Exchange Restructuring Bill ;
- Places obligations on exchanges to provide information and assistance to the Commission.
Review of securities trading law
The third stage of the reform process is a review of securities trading law.
Officials are carrying out that review at the moment and discussion documents around it will be released shortly.
We are looking at a first principles review of insider trading law, whether further market manipulation law should be introduced in New Zealand and how to improve the penalties, remedies and the application of securities trading law.
When considering capital market reforms the government has always worked towards a market where small and overseas investors should feel the rules are fair and adequately protect their interests, while not imposing excessive compliance costs.
Also, that investors are satisfied that the New Zealand regulatory system complies with appropriate international norms and best practice. This is important because of a number of factors:
- First, liberal capital markets have led to a trend for countries to move to sets of international principles and norms. Compliance with international principles can help satisfy investors that a country has a market of integrity with adequate protections where laws are enforced. Meeting these standards not only encourages overseas investment but may also discourage local investors from investing offshore where they may have greater confidence in market integrity.
- Second, it is critical for New Zealand as a small open economy that our policies and regulatory frameworks take into account those of our key economic partners. While we will not import inadequate laws from other countries, we recognise that there are costs - such as transaction costs - in our laws being different.
As well as the Government’s three-stage reform program for capital markets, other government initiatives in the business law area are in train. For instance:
- The Securities Commission has just made recommendations to the government regarding the law relating to investment advisers. The government will have to consider this issue, and I am expecting a report from officials on this by the end of this month.
- A new Business Law Reform Bill is being drafted that, among other things, is designed to reduce the cost of capital raising for small, innovative and potentially high growth enterprises.
- A review of the personal and corporate insolvency regime is underway, some law reform decisions have already been made and others due later this year.
- A review of the ratings and deposits for general insurance is near its end - a Bill is due to be introduced this year. And a review of the Insurance Act 1908 is in its initial stages with discussion documents due to be released later this year.
- As corporate governance issues cut across all areas of business law, issues that raise corporate governance concerns are being closely monitored. In particular, officials are monitoring the impact of issues arising from the collapse of Enron which could have implications for New Zealand.
This is just a brief summary of the Government’s vision for the reform of New Zealand’s securities markets and the place of the Takeovers Code in that vision.
The first part of the reform program, implementation of the Takeovers Code, has been successful and I encourage you to contribute to the other parts of our program. It is essential that government and business have an effective partnership for the robustness of our capital market.
The New Zealand market is not the Wild West. Even countries with markets with good reputations have experienced corporate failures, for example HIH in Australia and Enron in the United States. Our law must, as in other countries, keep up with international best practice and try to anticipate problems in our market before they occur.
This is the focus of our law reform program. Thank you for your time.