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Offers of securities in takeover bids. A discussion paper [2001] NZSecCom 2 (31 May 2001)

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Offers of Securities in Takeover Bids

A DISCUSSION PAPER
SECURITIES COMMISSION

31 May 2001
TABLE OF CONTENTS

PART I INTRODUCTION

PART II BACKGROUND

• The Securities Act 1978
• Takeover Offers
• The Takeovers Code
• Takeover regulation in Australia and the United Kingdom
• What regulation applies if no exemption is granted?

PART III PROPOSALS

• Proposal One
• Proposal Two
• Proposal Three
• Proposal Four

PART IV CONSEQUENCES OF EXEMPTIONS

• Registered prospectus
• Investment statement

PART V COMMISSION PREFERENCE

APPENDIX A Discussion Questions

APPENDIX B Details of Proposal Two

The Securities Commission is an independent statutory body established under the Securities Act 1978. It has power to exempt any person or class of persons from compliance with various provisions of the Securities Act and the Securities Regulations 1983.

This paper raises the question whether the Commission should grant an exemption in respect of securities offered as part of a takeover bid under the Takeovers Code, and presents a number of options for consideration. We invite comment on the matters raised in this paper.

The Securities Commission is subject to the Official Information Act 1982. It is the Commission's practice to make available to third parties any submissions that it has received if it is requested to do so under the Act.

If you do not want your submission to be passed on to third parties, and consider that there is good reason under the Act for us to withhold it, please let us know.

If we do not receive a request to treat a submission as confidential for the purposes of the Act, we may make your submission available to third parties if requested.

Securities Commission
12th Floor, Reserve Bank Building
2 The Terrace
PO Box 1179
WELLINGTON

Ph (04) 472 9830
Fax (04) 472 8076
E mail seccom@seccom.govt.nz
Web site www.seccom.govt.nz

PART I
INTRODUCTION

1. The Securities Commission is an independent statutory body established under the Securities Act 1978. It has power to exempt any person or class of persons from compliance with various provisions of the Securities Act and the Securities Regulations 1983.
2. The Takeovers Code comes into force on 1 July 2001. Also on that date the current statutory exemptions in the Securities Act in respect of securities offered in a takeover will cease to apply. Both the Takeovers Code and the Securities Act make provision for the disclosure of information. Where a takeover bid involves an offer of securities there may be some overlap between the two.
3. This paper raises the question whether the Commission should grant an exemption in respect of securities offered as part of a takeover bid under the Takeovers Code, and presents a number of options for consideration. The Commission is seeking public responses on these and on the matter generally.
4. The key question for consideration is the nature of the information that should be disclosed when securities are offered as part of a takeover offer. Should an offer of securities as consideration for the purchase of shares in a takeover regulated under the Takeovers Code be treated in the same way as an offer of securities made for the purpose of raising funds from the public? If not, should the Commission use its power of exemption to distinguish them? How?
5. This paper discusses takeover offers and the relevant legislation, and goes on to set out four proposals for a possible class exemption from securities law. A number of discussion questions are set out at the end of the paper, in Appendix A.
6. As the questions show, any exemption in respect of a takeover offer that includes an offer of securities will give rise to a number of important and, at times, complex questions. These need to be carefully assessed. We would be pleased to have responses in respect of all the questions.
7. This paper may be downloaded from the Commission's web site, www.seccom.govt.nz.
8. Comments on this discussion paper should be sent to the Commission by Friday 15 June 2001. These can be emailed to chris.holland@seccom.govt.nz or sent by post to:

Chris Holland
Securities Commission
PO Box 1179
Wellington

PART II
BACKGROUND

The Securities Act 1978

9. The Securities Act regulates the offer of securities to the public. The Act expressly excludes certain offers from being "offers of securities to the public" at section 3(2). Currently sections 3(2)(c) and 3(2)(d) exclude takeover offers made under Part I of the Companies Amendment Act 1963, and offers of securities made pursuant to a takeover code in force under the Takeovers Act 1993.
10. Sections 3(2)(c) and 3(2)(d) of the Securities Act have been repealed with effect on 1 July 2001, the day the Code comes into force, as will the Companies Amendment Act itself.
11. The Commission is considering whether to use its powers of exemption under section 5(5) of the Securities Act to create a class exemption in respect of some or all of the offers to which the Takeovers Code and the Securities Act both apply. With the repeal of section 3(2)(d) takeover offerors wishing to offer securities will need to comply with securities law but subject to any exemption from designated provisions of the Securities Act and Regulations under a Commission exemption, and to any conditions of exemption that the Commission may apply.
12. The purpose of this paper is to consider whether this power should be used, and if so, how.

Takeover offers

13. A takeover offer can be financed by cash, securities, or both. Consequently shareholders in a company that is the target of a takeover offer (the "target company") may be offered cash, or securities, or some combination of these as consideration for their shares in the target company.
14. If securities are offered as consideration in a takeover bid then that bid may also be an offer of securities to the public for the purposes of the Securities Act 1978. Potentially several types of circumstances arise in which securities may be offered in a takeover offer:
    1. newly issued securities or previously allotted securities;
    2. debt or equity securities;
    100. securities that are issued by the offeror itself or securities issued by a third party.

The Takeovers Code

15. The Takeovers Code was enacted under the authority of the Takeovers Act 1993, and will come into force on 1 July 2001. The Code will govern any takeover offer made for a "Code company", the term used in the Code for companies under its jurisdiction. A Code company is any company that is listed on the New Zealand Stock Exchange ("NZSE"); any company that has been listed on the NZSE within the last twelve months; or any company with 50 or more shareholders and at least $20,000,000 of assets.
16. For the purposes of this paper the Commission is concerned with the parts of the Code that set out disclosure requirements that the offeror and target company must comply with. The full text of the Code is published on the website of the Takeovers Panel ("the Panel"), www.takeovers.govt.nz.
17. Under the Code the offeror is required to issue an information document about the offer to all shareholders in the target company, and the target company itself is required to issue a target company statement. The contents of the takeover offer document are specified in the Schedule 1 of the Code and must include information about:
    1. the offeror and its directors;
    2. the target company;
    100. the terms and conditions of the offer;
    4. the equity securities of the target company held or controlled by the offeror and people associated with it, and any person with more than 5% of the relevant class;
    5. the names of any persons who have agreed conditionally or unconditionally to accept the offer;
    6. arrangements by the offeror to pay the consideration, and a statement of the target company shareholders' rights if payment is not made;
    7. particulars of any arrangements between the offeror, and its associates, and the target company, or any related company, in connection with or in response to the offer;
    8. particulars of any arrangements between the offeror, and its associates, and the directors or senior officers of the target company, or any related company, in connection with or in response to the offer;
    9. particulars of any financial agreement or arrangement made under which the target company, or any related company, would directly or indirectly provide assistance for the offer;
    10. whether the offeror has reserved the right to acquire equity securities outside the terms of the offer in accordance with Rule 36 of the Code;
    11. a statement as to the likelihood of changes in the target company (unless the offer is conditional on acquiring over 90% acceptances, and the 90% condition cannot be waived);
    50. details of any pre-emption clauses in the target company's constitution affecting target company shareholders;
    13. details of any escalation clauses;
    14. an independent advisor's report (required where the offeror is seeking to acquire shares in two or more classes of target company shares, in order to confirm the fairness of the offer between the classes);
    15. details of securities offered (this topic is so important that it is discussed in more detail below); and
    16. a certificate signed by the offeror, or the offeror's directors, vouching for the contents of the takeover offer document.
18. The contents of the target company statement are set out in Schedule 2 of the Code and must include:
    1. the name and directors of the target company;
    2. the number, designation and percentage of shares in the target company held by its directors and senior officers and their associates, as well as details of any recent trading by these individuals or share issues to them over the last two years;
    100. the number, designation and percentage of shares in the target company held by any person holding more than 5% of the target company's shares;
    4. whether any director or senior officer of the target company, or any of their associates, have accepted the offer or intend to accept it;
    5. if the offeror is a company, details of any shares held in the offeror by the target company, or by the directors and senior officers of the target company and their associates, together with details of any recent trades;
    6. particulars of any arrangements between the offeror, and its associates, and the target company, or any related company, in connection with or in response to the offer;
    7. particulars of any arrangements between the offeror, and its associates, and the directors or senior officers of the target company, or any related company, in connection with or in response to the offer;
    8. a statement as to whether any director or senior officer, or associated person of a director or senior officer, or 5% shareholder has a material interest in any contract that offeror, or any related company of the offeror, is a party to;
    9. if the target company directors consider that any information in the takeover offer document is incorrect or misleading, any additional information that would remedy this;
    10. a recommendation from the directors whether target company shareholders should accept the offer, or a statement that the directors do not make a recommendation and their reasons for not making a recommendation;
    11. details of the equity securities of the target company;
    50. details of any agreement or arrangement entered into as a consequence, in response to, or in connection with, the takeover offer, and a statement whether there are any negotiations underway as a consequence of, in response to, or in connection with, the offer, that could lead to a merger, amalgamation, or reorganisation of the target company or its securities or assets;
    13. financial information on the target company;
    14. an independent advisor's statement on the merits of the takeover offer;
    15. details of any asset valuations in the target company statement;
    16. details of the assumptions behind any prospective financial information contained in the target company statement;
    17. details of the market performance of the target company's securities (if quoted), or any information the target company has regarding its trades (if not);
    18. any other information that could reasonably be expected to be material in an offeree's decision whether or not to accept the offer;
    19. a certificate signed by the target company's directors vouching for the contents of the target company statement.

PART II
BACKGROUND

19. Clause 18 of Schedule 1 provides a disclosure requirement in certain circumstances where securities are offered as consideration. The clause provides in full:
    1. "If the consideration offered under the offer includes securities (within the meaning of the Securities Act 1978), the issuer of which is a public issuer that has a class of equity securities that has been quoted on the Stock Exchange for at least 12 months before the date of the offer, the offeror must -
       1. make available to offerees (on request) the most recent annual report of the issuer of the securities; and
       2. disclose in the offer document or send with the offer document -
          1. the name of the issuer of the securities offered as consideration and its relationship to the offeror; and
          2. the material terms and conditions of the securities; and
          3. a copy of the most recent half-yearly report of the issuer relating to a period after the annual report referred to in paragraph (a), if any; and
          4. a copy of the most recent interim report of the issuer relating to a period after the annual report referred to in paragraph (a), if any, or, if a copy of a half-yearly report has been disclosed under sub-paragraph (iii), a copy of any interim report of the issuer relating to a period after that half-yearly report, if any; and
          5. any other information that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer; and
          6. if there is no information referred to in subparagraph (v), a statement to that effect.
    2. Subclause (1) does not apply if the issuer is required by the Securities Act 1978 to register a prospectus in relation to the securities offered as consideration under the offer."
20. Clause 18(1) only applies to securities issued by a public issuer which has had a class of equity securities quoted on the NZSE for at least 12 months. Potentially clause 18(1) could apply to securities that are not quoted, provided that another class of the issuer's securities were. For example, clause 18(1) could apply to an offer of non-quoted capital notes that a company whose shares are quoted on the NZSE is using to finance a takeover offer.
21. Clause 18(2) limits the application of clause 18(1) to situations where a prospectus is not required. This will be the case where previously allotted securities are offered as consideration for a takeover offer, and the issuer of the securities is exempted from compliance with Part II of the Securities Act by reason of section 6(1) of the Act.
22. On the face of it this may also be the case where the Commission grants an exemption from the requirement to register a prospectus, pursuant to section 5(5) of the Securities Act. However, we are informed that clause 18 was enacted on the assumption there would be a statutory exemption from the obligation of an offeror to comply with Part II of the Securities Act in the circumstances described in clause 18.
23. There is a fundamental policy question on whether any rules of securities law should cease to apply to scrip offers made in the course of a takeover, for example the rules about:
    1. the disclosure of all information that is material to the offer of securities;
    2. the signatures of issuers, directors and promoters;
    100. the liability of issuers, directors and promoters;
    4. voidness and voidability of allotments; and
    5. the powers of the Commission to intervene and, for example, suspend, cancel or prohibit documents.
20. There will be no equivalent for many of these things in takeovers law when the Code comes into force on 1 July.

Takeover regulation in Australia and the United Kingdom

25. The approaches adopted in other jurisdictions may be of assistance in evaluating proposals. Australia and the United Kingdom have differing approaches on the nature of securities regulation required in a takeover situation.
26. In Australia the Corporations Law excludes offers of securities in a takeover offer from the requirement to register a prospectus. However, takeover offerors are required to provide a offeror's statement, and where securities are offered this document must include the information required in a prospectus. There are equivalent provisions about liability and regulatory intervention. The effect is that while there is a statutory exemption equivalent to section 3(2)(d) of our Securities Act, the regulatory requirements remain effectively the same.
27. In the United Kingdom there are statutory exemptions, contained in the Financial Services Act and Public Offers of Securities Regulations, providing that the usual requirements of securities law do not apply to offers of securities made in the course of a takeover offer. Takeovers in the United Kingdom are regulated by the City Code on Takeovers and Mergers. The City Code sets out disclosure requirements for takeover offers, and as a part of these requirements offerors must provide information about the securities that are being offered as consideration.
28. In summary, the Australian Corporations Law does not require takeover offerors offering securities to register a prospectus, but does subject offeror statements to equivalent rules of law, not only about disclosure but also about liability and regulatory intervention. United Kingdom securities law exempts takeover offerors from ordinary securities law compliance, and relies on the City Code to ensure acceptable standards in respect of the offer of securities as part of a takeover offer.

What regulation applies if no exemption is granted?

29. If neither the Commission nor the Panel decides to grant an exemption in respect of takeover offers of securities where securities law applies, then offerors who wish to offer securities as consideration for their offers will need to comply with both the Securities Act and Takeovers Code.
30. If the offeror offers its own new securities for subscription, or the existing securities of another company with the advice, encouragement or knowing assistance of the issuer, the offeror would need to register a prospectus and prepare an investment statement in respect of the securities, and to comply with the Code.
31. There is a degree of duplication between the disclosure requirements of the Code and the Securities Regulations. If offerors are to be required to fully comply with both the Code and the Securities Regulations, certain information may need to be disclosed twice, and certain information may need to be disclosed which is not well tailored to an issue of securities for financing a takeover offer. In addition, the offeror will need to prepare three prescribed statements, a takeover offer document, a registered prospectus and an investment statement.

PART III
PROPOSALS

32. The Commission has formulated four proposals for addressing this matter.
33. The four proposals are outlined in this paper. They relate to the registered prospectus and investment statement. We do not have it in mind to consider granting an exemption in respect of the requirement, where appropriate, to have a trustee and trust deed. The proposals are:
    1. Proposal One - The Commission does not grant an exemption from any of the requirements of the Securities Act or Regulations. To the extent that there is duplication, the Takeovers Panel considers whether to grant exemptions under its own equivalent powers.
    2. Proposal Two - The Commission grants all offerors a partial exemption for takeover offers offering securities, exempting from specific provisions in the Securities Regulations where they are duplicated in the Takeovers Code or are otherwise inappropriate.
    100. Proposal Three - The Commission grants a partial exemption for takeover offerors offering listed securities, exempting the offeror and issuer from most if not all disclosure provisions of the Securities Regulations on the condition that the prospectus contains information as generally required in clause 18(1) of Schedule 1 of the Code. Takeovers involving securities other than listed securities would receive the same exemption as outlined in Proposal Two.
    4. Proposal Four - The Commission grants a full exemption from the requirement to register a prospectus for takeover offerors offering listed securities, on the condition that the takeover offer document contains the type of information generally required under clause 18(1) of Schedule 1 of the Code, an exemption similar to that granted in the Securities Act (Amalgamations) Exemption Notice 2000 (SR 2000/168). Other takeover offerors would receive the same exemption as outlined in Proposal Two above.

PROPOSAL ONE

34. One option for the Commission is not to grant an exemption, leaving the process to the Takeovers Panel to grant exemptions as it sees fit. The Takeovers Panel, under section 45 of the Takeovers Act 1993, has the power to grant exemptions from any provision of the Takeovers Code.
35. The advantages of this would be:
    1. it would not compromise the operation of securities law in respect of an offer of securities to the public to which the law clearly applied; and
    2. it would leave it to the primary takeovers regulator, the Panel, to decide what adjustments should be made, whether by amendment to, or exemption from, the Code, to meet the reasonable needs of the business community and the investing public in respect of takeover offers.

PROPOSAL TWO

36. Proposal Two involves granting a limited number of exemptions from the prospectus and investment statement requirements where they apply.
37. This proposal would treat all takeover offerors in the same way, and so would not make a distinction between categories of offerors. It would involve:
    1. requiring all offerors to register a prospectus, but granting an exemption from selected aspects of the prospectus disclosure requirements;
    2. requiring all offerors to provide an investment statement, but granting an exemption from selected parts of the Schedule 3D requirements;
    100. in the case of debt securities, requiring all takeover offerors to register a trust deed and appoint a trustee.
38. It appears that there may be provisions in the First Schedule to the Securities Regulations that could be seen as being unnecessary or less than useful when equity securities are being offered as consideration for a takeover offer. Likewise there are similar provisions in the Second Schedule in the context of offers of debt securities. The exemption would be limited to these matters.
39. Appendix B contains a preliminary indicative list of the provisions of the Schedules that could be the subject of exemptions.
40. The advantage of this proposal would be that it ensured substantial compliance with securities law and avoided unnecessary duplication of obligation arising under the two bodies of applicable law.

PART II
BACKGROUND

PROPOSAL THREE

41. Proposal Three establishes a special class of issuers. Under Proposal Three where the issuer of the securities is listed and the securities to be offered are of a class that is quoted on the New Zealand Stock Exchange ("NZSE") the offeror, and the issuer where different, would be exempt from the standard content requirements for registered prospectuses, but would be required to register a prospectus which contained the information generally as specified in clause 18(1) of Schedule 1 of the Takeovers Code, in the nature of a short form prospectus. Proposal Two would continue to apply where the securities were not of a class which is quoted on the Exchange.

Dividing issuers into categories

42. There are a number of points that can be made in favour of a special arrangement for listed issuers and their quoted securities:
    1. accurate, timely and regular information about the issuer of securities;
    2. accurate and timely information about transactions being carried out in the securities;
    100. liquidity, recognising the spread provisions in the NZSE Listing Rules;
    4. information about the past performance and track record of the issuer of the securities, where the issuer has been listed on the NZSE for some time;
    5. standard governance rules, for example, NZSE Listing Rules about the appointment of directors.

Scope of the exemption

43. If listing on the NZSE is used as a criterion for establishing a special class of issuers, then other questions will arise. For example, should there be a minimum time period for issuers to have been listed, as envisaged by clause 18 of Schedule 1 of the Takeovers Code? Where a listed issuer wishes to finance a offer with an offer of unlisted securities, should the class exemption still apply?
44. An alternative class of issuers could be that used in clause 18(1) of Schedule 1 of the Takeovers Code. That is, the modified disclosure requirements would apply where:
    1. the securities that are being offered as consideration are issued by an issuer that has a class of equity securities quoted on the NZSE; and
    2. those equity securities have been quoted for at least twelve months
45. Potentially, therefore, this would include unquoted securities issued by a listed issuer. Respondents may consider that other matters should be taken into account in defining the class. As with the other matters put forward in this paper, the Commission welcomes suggestions.

Other material information

46. Clause 18(1) of Schedule 1 of the Code provides for the disclosure in the takeover offer document of "the material terms and conditions of the securities" and "any other information that could reasonably be expected to be material to the making of a decision by the offerees to accept or reject the offer".
47. The First Schedule to the Securities Regulations provides for the disclosure of particulars of any material matters relating to the offer of securities not otherwise disclosed at clause 40. There is an equivalent provision in the Second Schedule (clause 34).
48. The question arises whether the Code provisions deal adequately with the need to disclose other material matters relating to the offer of securities or whether there should be a condition of any exemption that there is disclosure in terms of the First or Second Schedule.

Investment Statements

49. The same exemptions for investment statements would apply for listed issuers under Proposal Three as for the preliminary indicative list under Proposal Two, that is, exemptions from provisions of Schedule 3D of the Securities Regulations as in Appendix B to this paper.

Liability provisions

50. Where material is attached to, or referred to, in a prospectus it is deemed to be included in the prospectus by way of section 55 of the Securities Act. A question that arises is whether the information suggested above is sufficient, or whether the takeover offer document should be incorporated by reference in the prospectus.

Advantage of Proposal Three

51. The advantage of this proposal would be that the key provisions of securities law including the liability provisions and the Commission's power of intervention would continue to apply but the information to be disclosed would reflect the judgement of the Panel, as expressed in the Takeovers Code, on the nature of the information which was "material to the making of a decision by the offerees to accept or reject the offer".
52. It would still be necessary for the offeror to prepare three prescribed documents, the takeover offer, the registered prospectus and the investment statement. However, the information to be disclosed in each document is separately prescribed and, we consider, will need to be separately disclosed to avoid confusion. It may be that each of the documents can be in the nature of separate sections of the full offer documentation. We consider that there will be advantages in providing for disclosure in this way.

PROPOSAL FOUR

53. Proposal Four follows Proposal Three in establishing a special class of issuers.
54. Proposal Four would exempt the offeror, and the issuer where different, from the requirement to register a prospectus in respect of securities offered in a takeover offer where the issuer is a listed company and the securities are quoted on the NZSE. This would follow the general model provided by the Securities Act (Amalgamations) Exemption Notice 2000 (SR 2000/168).
55. Such an exemption would be conditional on the same information being provided as with Proposal Three above, that is, the information as generally prescribed in clause 18(1) of Schedule 1 of the Code and, if this seems appropriate, other material information in the terms of the Schedules to the Securities Regulations
56. It may also seem appropriate to consider granting an exemption from the investment statement provisions of securities law, subject to the condition that the offer document contained a statement providing key information that may assist a prudent but non-expert person to decide whether or not to subscribe for securities (or, in this case, to accept the takeover offer).
57. The advantage of this proposal would be that it would bring the regulation of takeovers, so far as it related to the offer of securities to the public, in line with the scheme at present applying under a Securities Commission exemption for amalgamations. Is this an important consideration, even while recognising that the Commission may wish to review its present policy on the amalgamations exemption? Would arbitrage questions arise if takeovers and amalgamations were regulated in a different way?
58. A disadvantage of this proposal is that many of the core rules of law about the registered prospectus and the investment statement would not apply, including the specific information required by the Schedules to the Securities Regulations, and the provisions relating to liability and regulatory intervention contained in the Securities Act.

PART IV
CONSEQUENCES OF EXEMPTIONS

Registered Prospectus

59. Questions relating to the disclosure of information can be rationalised to the extent that this may be necessary by use of the exemption power. However, if the Commission were to grant an exemption from the requirement to register a prospectus, then the civil and criminal liability provisions, the rules about voidness, the Commission's intervention powers and the Registrar's powers to decline to register the prospectus as set out in the Securities Act, would no longer apply.
60. It seems to us that dispensing with the requirement to register a prospectus may reduce the compliance costs for issuers, but it would remove the protections provided to holders of securities under Part II of the Securities Act.

Investment Statement

61. Any exemption from the obligation to prepare an investment statement would be subject to the condition that elsewhere in the takeover offer documentation there is a statement providing key information that is likely to assist a prudent but non-expert member of the public to decide whether or not to accept the takeover offer. For example, the answer to the question "What are my risks?" should be included. It is possible that formal exemption from the investment statement requirement may not achieve a great deal.
62. Whether or not there is an exemption for the investment statement, the takeover offer documents would come within the Act's definition of "advertisements" in section 2A(1), where they relate to offers of securities. The advertisement liability provisions would apply. However, the Commission would not then have the dual powers of suspension and prohibition that it possesses in relation to an investment statement, and would rely, should the need arise, on the rather more blunt power of immediate prohibition.

PART V
COMMISSION PREFERENCE

63. The Commission has not yet made a decision whether to grant any exemption or, if it does, what the exemption might be.
64. However, it believes it is important to ensure that good quality information is available in offers of securities in takeovers, to standards set by reference to the core provisions of securities law.
65. It believes that there should be comparable rules about liability for false or misleading offer documents and comparable powers for the Commission to intervene where this is appropriate under securities law, notwithstanding that the Takeovers Panel also has powers of intervention under the Takeovers Act and Takeovers Code.

APPENDIX A - DISCUSSION QUESTIONS

Question One
Should any exemptions be granted in respect of some or all of the offers which will, after 30 June, be covered by the Takeovers Code?

Question Two
If any such exemption is to be granted, should we distinguish between classes of issuers?

Question Three
If so, is listing or quotation on the New Zealand Stock Exchange an appropriate criterion for establishing a class?

Question Four
If listing on the New Zealand Stock Exchange is accepted as the basis for an exemption, should the exemption only apply to quoted securities?

Question Five
Should the Commission grant an exemption for listed offerors and issuers from the requirement to register a prospectus?

Question Six
Should the Commission grant an exemption for any other issuers from the requirement to register a prospectus?

Question Seven
If an exemption is granted from the requirement to register a prospectus, what types of information should offerors be required to provide?

Question Eight
Should an exemption be granted for listed issuers from the requirement to make the offer in an investment statement?

Question Nine
Would the information required in an investment statement be useful in a takeover situation?

Question Ten
Would providing information equivalent to that required in an investment statement in another document be as useful as an investment statement?

Question Eleven
Should the process of an exemption be left to the Takeovers Panel, as suggested in Proposal One?

Question Twelve
Do the suggestions in Appendix B in relation to Proposal Two prevent duplication of information and the disclosure of information which may otherwise be inappropriate?

Question Thirteen
Are there other provisions in the Securities Regulations that may usefully be the subject of an exemption other than those listed in Appendix B?

Question Fourteen
If the Commission were to adopt Proposal Three, should it use the class set out in that proposal, or that set out in clause 18(1) in the Schedule 1 of the Code, or some other alternative?

Question Fifteen
Should other material than that listed in Proposal Three be required in a short form prospectus? If so, what? Should this include a general requirement to disclose "other material matters" in the form provided in the Schedules to the Securities Regulations?

Question Sixteen
Would such an exemption as set out in Proposal Four provide sufficient disclosure for potential investors? Would it provide an adequate basis for regulating an offer of securities made as part of a takeover offer?

Question Seventeen
Would arbitrage questions arise if amalgamations and takeovers were regulated in a different way?

Question Eighteen
If Proposal Four were adopted, should it apply to a more broadly defined class of securities?

Question Nineteen
Is it of concern that an exemption from the requirement to register a prospectus would remove some of the statutory grounds for prosecution, civil action or Commission intervention under Part II of the Securities Act?

APPENDIX B - DETAILS OF PROPOSAL TWO

66. As outlined in the main paper, there are a number of provisions in the Schedules to the Securities Regulations that could usefully be the subject of an exemption. This appendix provides a preliminary indicative list of these.

First Schedule

Clause 1(4)

67. Clause 1(4) of the First Schedule requires disclosure of "[t]he price or other consideration to be paid or provided for the securities being offered".
68. In a takeover scrip offer the target company shareholder is asked to exchange shares in the target company for the scrip that the offeror is putting forward as consideration. Hence the "consideration ... for the securities being offered" is the target company shares that the shareholder is being invited to give up.
69. The Code requires disclosure of this information, under clause 5 of the First Schedule, which requires that all the terms and conditions of the offer be disclosed in the takeover offer document. The terms of the offer, for example, "two bonds in Newco for each target company share", will be a necessary part of the disclosure under the Code and will be prescribed in terms appropriate for a takeover situation.
70. It would appear that clause 1(4) of the First Schedule is not entirely relevant to takeover offers, and could be replaced with a more appropriate requirement.

Proposal

71. That the Commission exempt takeover offerors from clause 1(4) of the First Schedule to the Securities Regulations, subject to the condition that the registered prospectus contains the following text in its place: "This information is contained in clause 5 of the Takeover Offer".

Clauses 2(a) and 2(b)

72. Clauses 2(a) and 2(b) require disclosure of the name and address of the offeror, if the offeror and issuer are different parties. However, this information is already required in the takeover offer document (at clause 2). Because the information required in clauses 2(a) and 2(b) is already disclosed, it may be possible to exempt these requirements.

Proposal

73. That the Commission exempt takeover offerors from clauses 2(a) and 2(b) of the First Schedule to the Securities Regulations.

Clause 10

74. Clause 10 applies to initial public flotations. Where takeover offerors have already issued securities to the public they will not be required to comply with this clause. However, the clause is applicable for issuers who are making a public issue for the first time in order to finance a takeover offer. For example, if a company that has never offered securities to the public before wishes to take over a Code company and do so by offering new shares, then the clause will apply.
75. Clause 10(1)(b) requires a statement as to whether the proceeds of the offer may be applied to any undertakings of the issuer. Ordinarily "the proceeds of the offer" are cash sums paid by the investing public for equity securities in the issuing entity, in which case disclosure of the intended use of the funds is of relevance to investors. However, in the context of a takeover offer "proceeds of the offer" are target company shares, and control of the resources of the target company itself.
76. Clause 10(1)(b) may require modification to be of use in a takeover situation. We suggest that in its place a statement of the offeror's intended activities with the target company, and the result for the offeror of the takeover, would be of assistance.
77. Likewise clause 10(2) may require modification. Clause 10(1)(c) requires the issuer to provide a statement of expected cash flows, and clause 10(2) details the information required: (i) the likely receipt and proposed use of the proceeds of the offer, and (ii) the principal assumptions behind the statement of cash flows. Again we suggest that an exemption may be helpful.

Proposal

78. That the Commission exempt takeover offerors from clauses 10(1)(b) and 10(2) of the First Schedule to the Securities Regulations, subject to the following conditions:
    1. that in place of clause 10(1)(b) the registered prospectus should provide a statement of the offeror's intentions concerning the target company, and the expected effect of the takeover upon the offeror's operations; and
    2. that in place of clause 10(2) the registered prospectus should specify that the statement of cash flows required by clause 10(1)(c) will show the likely effect of the takeover upon the cash flows of the offeror, and the principal assumptions that the statement of cash flows is based on.

Clause 11

79. Clause 11 requires the disclosure of information concerning business acquisitions in certain situations. Clause 11(3)(b) applies where the issuer, or a member of the issuing group, intends to acquire a business or subsidiary. Hence, in a takeover offer situation, disclosure under clause 11(3)(b) would be mandatory if the business or subsidiary is to be acquired for consideration of not less than one-fifth of the issuer's total tangible assets.
80. It appears that there are two issues with this disclosure requirement. The first is that in a hostile takeover situation the issuer may not be able to obtain all the necessary information about the target company. Secondly, some of this information may already be duplicated in the target company statement that the target company is required to provide to all shareholders to help them decide whether or not to accept the offer.
81. For these reasons it seems that this particular provision may be an appropriate subject for an exemption.

Proposal

82. That the Commission exempt takeover offerors from clause 11(3)(b) of the First Schedule to the Securities Regulations, subject to the conditions that:
    1. the registered prospectus should contain all of the information required under clauses 11(3)(c) to 11(3)(g) that the issuer can verify which is not already contained in the takeover offer document or target company statement; and
    2. the registered prospectus should state what information contained in clauses 11(3)(c) to 11(3)(g) can be found in the takeover offer document and target company statement, and include a cross-reference to that information; and
    100. the registered prospectus should state what information contained in clauses 11(3)(c) to 11(3)(g) is not in the registered prospectus, the takeover offer document, or the target company statement, and why the issuer is not able to verify that information.

Second Schedule

83. In a similar manner, there are requirements in the Second Schedule to the Securities Regulations which duplicate provisions in the Takeover Code or may be inappropriate in the context of a takeover, and could appropriately be the subject of an exemption.

Clause 1(4)

84. Clause 1(4) of the Second Schedule requires the disclosure of "[t]he price or other consideration to be paid or provided for the securities being offered". This matches the wording of clause 1(4) of the First Schedule.
85. It appears that the information required by clause 1(4) of the Second Schedule is not entirely relevant to a takeover, for the same reasons as put forward in relation to clause 1(4) of the First Schedule, and should be replaced with a similar requirement.

Proposal

86. That the Commission exempt takeover offerors from clause 1(4) of the Second Schedule to the Securities Regulations, subject to the condition that the registered prospectus contains the following text in its place: "This information is contained in clause 5 of the Takeover Offer Document".

Clause 2

87. Clauses 2(a) and 2(b) of the Second Schedule are identical to clauses 2(a) and 2(b) of the First Schedule, in that they require disclosure of the name and address of the offeror, if the offeror and issuer are different parties.
88. In this respect the considerations for the Second Schedule are the same as for the First Schedule. The requirements of clauses 2(a) and 2(b) are met by the Code, which requires (at clause 2 of the First Schedule), that the takeover offer document must disclose this information. For this reason clauses 2(a) and 2(b) appear unnecessary.

Proposal

89. That the Commission exempt takeover offerors from clauses 2(a) and 2(b) of the Second Schedule to the Securities Regulations.

Clause 8

90. Clause 8 of the Second Schedule is materially similar to clause 11 of the First Schedule, in that clause 8 also deals with acquisitions. Clause 8(3)(b) requires disclosure where the issuer intends to acquire a business or equity securities, that will result in the issuer acquiring a subsidiary.
91. For the same reasons as discussed with clause 11(3)(b) of the First Schedule, clause 8(3)(b) of the Second Schedule may be an appropriate subject for an exemption. That is, that much of the information required for the purposes of clause 8(3)(b) will be contained within the takeover offer document and target company statement, and some of the remainder may be information that the issuer is not privy to.

Proposal

92. That the Commission exempt takeover offerors from clause 8(3)(b) of the Second Schedule to the Securities Regulations, subject to the conditions that:
    1. the registered prospectus should contain all of the information required under clauses 8(3)(c) to 8(3)(g) that the issuer can verify which is not already contained in the takeover offer document or target company statement; and
    2. the registered prospectus should state what information contained in clauses 8(3)(c) to 8(3)(g) can be found in the takeover offer document and target company statement, and include a cross-reference to that information; and
    100. the registered prospectus should state what information contained in clauses 8(3)(c) to 8(3)(g) is not contained in the registered prospectus itself, the takeover offer document, or target company statement, and why the issuer is not able to verify that information.

Schedule 3D

93. In a similar manner to the First and Second Schedules, Schedule 3D contains material that could appropriately be the subject of an exemption or modification in the context of a takeover.

Clause 2

94. Clause 2 specifies that the investment statement must provide "[a] brief description of the securities being offered".
95. This could be usefully supplemented in the case of a takeover offer. Because target company shareholders are being invited to exchange their target company shares for other securities, it could be of assistance to these shareholders if the investment statement also provided a brief description of the terms of the exchange of securities.

Proposal

96. That the Commission exempt takeover offerors from clause 2 of Schedule 3D to the Securities Regulations, subject to the condition that the information provided in the investment statement instead of clause 2 is "A brief description of the securities being offered, and of the terms of exchange of securities".

The heading "How do I pay?"

97. Schedule 3D specifies that the information it requires should be presented under headings in the form of questions. (The questions themselves are set out in clause 1 of Schedule 3D.) One of these is the heading / question above clauses 5 and 6, which is "How much do I pay?"
98. This heading may not be apt for target company shareholders. Ordinarily the issuer is seeking to raise funds from the investing public, but in this situation the offeror (who may or may not be the same person as the issuer) is encouraging target company shareholders to exchange their shares. For this reason an amended wording might avoid confusion. But, on balance, we think that the meaning of the present words in context would be reasonably clear.

Clause 5

99. Clause 5 of Schedule 3D provides disclosure of the monies payable by subscribers to the issuer in respect of the securities.
100. The nature of a takeover scrip offer, however, is that target company shareholders are not paying money to the offeror (or the issuer, if it is a separate party to the offeror). Consequently it does not appear that clause 5 can be of assistance in a takeover scrip offer situation.
101. For this reason it may be appropriate for a different clause 5 to apply. It would be useful for a new clause 5 to have the same objective, of providing information about the transaction, but take into account the different context of a takeover scrip offer.

Proposal

102. That the Commission exempt takeover offerors from clause 5 of Schedule 3D, subject to the condition that offerors provide the following information in its place:
     5. - Exchange of securities

A brief description of the terms of the exchange of securities, including:

1. the proportion of each target company shareholder's shareholding that the offeror wishes to acquire; and
2. the number of securities that the offeror is offering as consideration in return for target company shares, expressed as a ratio; and

100. any cash consideration that the offeror is offering as consideration, expressed as a cash sum for each target company share.

Summary of proposed exemptions for Proposal Two

103. If the Commission decides to adopt Proposal Two, this might involve the Commission granting a class exemption for takeover scrip offers on the basis set out above, and subject to the conditions set out above, that is:
     1. an exemption from clauses 1(4); 2(a); 2(b); 10(1)(b); 10(2); and 11(3)(b) of the First Schedule to the Securities Regulations;
     2. an exemption from clauses 1(4); 2(a); 2(b); and 8(3)(b) of the Second Schedule to the Securities Regulations;
     100. an exemption from clauses 2; 5; and 6 of Schedule 3D to the Securities Regulations.