BY BRIAN GAYNOR
New Zealand is finally to have a takeovers code, despite fierce opposition from the Business Roundtable, Stock Exchange and some fund managers.
When the code becomes effective next July 1, all shareholders will be treated equally in partial and full takeover offers.
Deals such as the Kirin/Lion Nathan transaction, where directors and large shareholders pushed to the top of the queue, will no longer be allowed.
In other words, the Government has taken the first step towards bringing the country's securities regulations into line with the rest of the world.
The takeovers code has been in an incubation stage for nearly 20 years, and there is little doubt that the sharemarket's performance would have been much improved had it been introduced in the mid-1980s.
The debate has raged since the introduction of the Companies Amendment Act 1963. This act, which legislates takeovers, was poorly drafted, and has been ineffective as far as partial acquisitions are concerned because it does not cover verbal bids or offers made through the Stock Exchange.
The Securities Commission has always strongly supported takeover reform, and in October 1983 it released a report recommending repeal of the 1963 act, replacing it with laws that would require written offers to all shareholders on equal terms.
The Government took no action, and the 1980s sharemarket boom was characterised by first-come, first-served offers, the transfer of controlling shareholdings without widespread shareholder participation, unequal pricing and other shenanigans. These activities would have been prohibited under effective takeover legislation.
Undisciplined takeover-related transactions led to the collapse of many listed companies and wasted billions of dollars of shareholders' money. The NZ Stock Exchange has never fully recovered from the excesses of the 1980s.
The takeover debate was reignited in 1988 when Lion Corporation merged with LD Nathan. Under the terms of the agreement:
*Fay, Richwhite received $9.20 cash a share for its 35 per cent of LD Nathan.
*All other shareholders received one Lion share for each LD Nathan share.
As Lion shares were $5.50 at the time Fay, Richwhite received a premium of $3.70 a share, or 67 per cent, over all other shareholders.
It was 10 years before Lion Nathan's share price reached the 920c a share received by Fay, Richwhite (after adjusting for a 2 for 1 share split following the 1988 merger).
Another feature of the controversy was that two LD Nathan directors, Robin Congreve and Geoff Ricketts, were directors of Fay, Richwhite's listed company Capital Markets.
The two-tier pricing of the Lion/Nathan deal would have been illegal in most Western countries, including the United States.
In October 1988, the Securities Commission produced a second report recommending takeover legislation that would give equal treatment to all shareholders and encourage a more competitive and open environment for takeovers.
The Government eventually responded to the calls for reform and on July 1, 1994, the Takeovers Act 1993 became law.
Its main purpose was to establish a panel that would formulate and administer a Takeovers Code.
A panel was formed and a code drawn up.
But after fierce lobbying from the Business Roundtable and the Stock Exchange, the National cabinet rejected the draft code in 1995 and the panel was disbanded.
The Business Roundtable and the Stock Exchange argued that large shareholders made the greatest contribution to a company and small shareholders were free riders.
Therefore, big investors should be allowed to receive a higher price for their shares and have unrestricted selling opportunities.
In the meantime, the Stock Exchange went on the front foot and unveiled its own takeover rules in 1994.
These regulations, which will continue to operate until the Takeovers Code becomes effective next year, are light-handed, requiring offerers to do little more than give notice before completing a transaction.
The Stock Exchange's rules bear no resemblance to takeover legislation in most Western countries or to tender-offer requirements in the United States.
Another controversial transaction was Kirin's bid for a controlling 35 per cent stake in Lion Nathan on April 27, 1998.
Early that morning, Lion Nathan announced that Douglas Myers had sold 86.4 million shares (15.6 per cent of the company) to Kirin of Japan for 540c a share.
This sale would not have breached takeover laws in other countries, as it did not exceed the 20 per cent threshold.
Kirin announced at 12.30 pm it was standing in the market for a further 24.4 per cent of Lion Nathan, and would give small investors an extra 24 hours to sell a further 5 per cent. This offer was also at 540c a share.
Institutions rushed to accept and within seconds of the offer opening, Kirin had gained a controlling interest in the country's largest brewery. Most Northern Hemisphere investors missed out because it was Sunday night in Europe and North America.
Small shareholders who knew of the offer were able to sell all their shares but those with more than 30,000 were scaled back to about a third of their holdings.
One of the features of the on-market bid was that several directors jumped to the top of the queue and were able to sell most of their holdings. Chris Mace realised $90.4 million, Mr Ricketts $31.8 million and Mr Congreve $20.7 million. These three directors sold 98 per cent of their combined holding, yet other large individual shareholders had their offers substantially scaled back.
Lion Nathan's highest share price since the Kirin offer has been 510c.
Kirin's market stand would not have been allowed in most Western countries, including the United States.
It would also have been prohibited under the 1995 code that the Business Roundtable and Stock Exchange lobbied against so fiercely.
Several Lion Nathan directors involved in the two controversial transactions - Mr Myers, David Richwhite, Alan Gibbs and Mr Ricketts - have been prominent members of the Business Roundtable. Mr Ricketts has also been a director of the NZ Stock Exchange since 1989.
Under the 1995 code, and the one to be introduced next year, Kirin would have had to stop at 20 per cent or bid for 50 per cent of Lion Nathan. The 50 per cent offer would have had to be made to all shareholders on a pro rata basis.
Kirin's first-come, first-served offer for 35 per cent would have been allowed had Lion Nathan shareholders approved the transaction at a general meeting.
The second Lion transaction was the final blow to the advocates of an unregulated takeovers market. It was widely criticised, particularly overseas, where investors were stunned to learn that Lion Nathan's directors had jumped to the top of the queue.
But the Business Roundtable and Stock Exchange continued to argue against a takeovers code.
Roger Kerr told the Otaki Rotary Club this month that his organisation had spent more than $100,000 on research opposing the "foolish takeover regulation proposals."
His recent submission to the panel claimed that "some of the public agitation for an equal price rule is clearly driven by envy and greed" and "small shareholders can free-ride" on large shareholders.
But Mr Kerr's arguments have become increasingly irrelevant and unrealistic. Ironically, support for his position on the takeovers code has diminished because of the actions of Roundtable members in the Kirin/Lion Nathan transaction.
The new code is long overdue, but it is not an instant cure for the malaise affecting the Stock Exchange.
It brings New Zealand's takeover rules into line with the rest of the Western world, and will begin to restore investor confidence.
But it will take shareholders a long time to forget the controversial Lion transactions and the multitude of other one-sided deals over the past 20 years.
Takeovers Code
Fundamental rules:
*All shareholders must be treated equally when a controlling stake in a company (more than 20 per cent) is acquired.
Rule applies to:
*Stock Exchange listed companies or companies that have been listed on the Exchange in the previous 12 months.
*Any company with 50 or more shareholders and assets of $20 million or more.
Major rules:
*Any person (and associated party) wishing to acquire more than 20 per cent of a company must make a bid for at least 50 per cent of the company. The offer must be made to all shareholders on a pro rata basis.
*The offeror may be exempt from making an offer to all shareholders if the shareholders of the target company vote in favour of this exemption at a general meeting (only disinterested parties may not vote).
*Having gained 50 per cent, the offerer may buy up to 5 per cent of the voting capital in any 12 month period without making a pro rata offer to all shareholders. Unrestricted acquisitions are allowed between 90 and 100 per cent.
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