Article - Extending the reach of the takeovers code

Extending the reach of the takeovers code

The Takeovers Code has been in force now for a number of years. However, changes made to the Code in late 2006 will mean that the Code applies to many more companies than has been the case in the past.

The Takeovers Code applies to “a code company”. In general, all companies which are listed on a registered stock exchange will be code companies. In addition, until late 2006, all companies which had 50 or more shareholders and $20m or more of assets were code companies.

Since late 2006, the Takeovers Code has been amended so that all companies which have 50 or more shareholders are code companies. The asset test has been removed. All those companies which have 50 or more shareholders, but have previously escaped the Takeovers Code because of the value of their assets, will need to take a careful look at the Code to see how it affects them.

Companies with about 50 shareholders will need to make a careful count of the number of their shareholders. This count may not be as simple as it seems.

The Takeovers Code does not provide any definition of “shareholder”. It is generally accepted that the definition of shareholder in the Companies Act is to be applied. As a result, the shareholders of a company will generally be those persons whose names are entered in the share register as the holder of one or more shares in the company.
This means that 3 people who jointly own a parcel of shares will be counted as 3 shareholders. If one of those people also owns shares in their own right, or as one of another group of joint owners, that person will still only count as one shareholder.

The companies that think they are safely under the shareholding threshold because of the number of parcels of shares on their register may be surprised when they actually count the number of shareholders.
It is important for shareholders in a company to know if their company is a code company under the Takeovers Code. The fundamental rule in the Code prohibits any person who holds or controls less than 20% of the voting rights in a code company from becoming the holder or control of more voting rights in the company if that person, together with their associates, would afterwards hold or control more than 20% of the voting rights in the company. Any person who already holds or controls more than 20% of the voting rights in a code company cannot increase the percentage of voting rights which they hold or control.

These rules are of course subject to the exceptions permitted by the Code, which include a full or partial takeover offer, shareholder approval, “5% creep”, and compulsory acquisition. There are very detailed rules surrounding each of these exceptions.

The Code also applies to changes in indirect control of voting rights in a code company, so change in shareholding in a company which holds shares in another company which is a code company, can be subject to the Code.

The Takeovers Panel takes an active interest in transactions which are subject to the Code. Shareholders who complete a transaction without complying with the Code can be subject to financial penalties, and orders requiring them to dispose of shares.

Shareholders in companies with more than 50 shareholders or who anticipate that they may reach that number in the near future, need to consider and be aware of the impact of the Code. Legal advice should be sought to ensure they comply with the Code.

Author: Sharp Tudhope Lawyers
For more information contact Sharp Tudhope Lawyers
Posted: 30 June 2008