Brian Gaynor: Tigerish Takeovers Panel leads the way

Three enforcement agencies - the Market Surveillance Panel, Securities Commission and Takeovers Panel - are responsible for policing the sharemarket. The first two are relative pussycats but the Takeovers Panel is more like a man-eating tiger.

It is determined to protect the integrity of the Takeovers Code whereas the other two find excuses for not taking decisive action.

The decision by the panel on TrustPower's share buyback shows it will take on big shareholders even when court proceedings are filed against it.

TrustPower is a Tauranga-based electricity generating and retail company that is 27.9 per cent owned by Infratil, 18.9 per cent by Alliant, 22.7 per cent by Tauranga Energy Consumer Trust and 20.5 per cent by The Australian Gas Light Company. The remaining 10 per cent is held by the public.

On March 20 TrustPower announced that it was making a pro-rata share buyback on a two-for-seven basis at $3.70 a share (the market price of TrustPower shares at the time of the offer was $4.05). The offer was to close on April 11, later extended to April 24, and acceptances could not be revoked.

As shareholders could accept the offer in respect of none, part, or all of their shareholding, then the move could see one or all of the major shareholders increase their ownership.

Under Rule 6 (1) of the Takeovers Code shareholders cannot increase their holdings beyond 20 per cent without making an offer to all shareholders. But under Takeovers Code (Class Exemptions) Notice (No 2) 2001 major shareholders can raise their holdings under a buyback offer if this is approved by a resolution of shareholders at a special meeting.

On March 26 TrustPower sent an offer document to shareholders with letter from chairman Harold Titter.

This said, "The board believes that it is appropriate to have an efficient gearing ratio and, accordingly, wishes to ensure that the company is not over-capitalised.

"It is anticipated that the return of capital will give TrustPower a more efficient capital structure and therefore enhance the return earned on shareholders' funds.

"Further, the buyback allows TrustPower to return the excess capital to shareholders in a tax-efficient manner and, while each shareholder is given the ability to participate in the buyback, no shareholder is compelled to do so."

The letter did not specify the earnings impact of the buyback or indicate whether the company's major shareholders would accept the offer. TrustPower's directors also didn't make a recommendation to shareholders.

But the most important point in the letter was that the shareholders' meeting, required to approve an increase in holdings by major shareholders, would not be held until June, two months after the issue closed.

This was like a red rag to a bull as far as the Takeovers Panel was concerned.

How could TrustPower hold the meeting, and send the independent adviser's report to shareholders, eight weeks after the offer closed?

At a Takeovers Panel hearing in Auckland on Monday, April 14 (the panel doesn't take long before it springs into action) TrustPower argued that it was appropriate that the special meeting be held after the buyback closed.

The company claimed that the notice of meeting and independent report could then inform shareholders, as it ought to do, about a known set of circumstances, because it was only then that the shareholdings of the four major holders could be determined.

TrustPower also submitted that the independent report must have regard to the interests of those persons who may vote to approve the [acquisition]. As who could or could not vote would not be determined until after the buyback offer closed then the meeting had to be held after this date.

The company filed court proceedings against the panel on Tuesday, April 15. This tactic is often used by organisations that wish to influence the decision of an underfunded enforcement agency.

But the Takeovers Panel is made of sterner stuff. In its decision, completed on Wednesday, April 16, it rejected the argument that the shareholder meeting should be held after the offer closed.

It said that the expressed objective of the code was to provide shareholders with adequate information to make a properly informed decision on whether to accept a takeover offer.

To send the independent adviser's report to shareholders after they have been required to decide whether to accept the buyback effectively negates one of the main purposes of the document.

The panel had some sympathy with the claim that it would be difficult to determine whether any of the four major shareholders had increased their percentage holding and could not vote until after the buyback was completed. But it believed that most of the major shareholders have already determined their strategy as follows:

* Alliant and Infratil had filed a substantial shareholder notice on March 26 indicating that they intended to increase their shareholding and, as a result, they could not vote.

* Tauranga Energy Consumer Trust has to engage in public consultation if it wishes to sell more than 5 per cent of its shareholding. As it had made no attempt to start a public consultation, the panel assumed it would not accept in respect of its full entitlement. Thus its voting entitlement would rise and it could not vote at the special meeting.

* The panel has assumed that The Australian Gas Light Company (AGL) would accept in respect of most, if not all, of its shareholding. As long as AGL had no agreements or arrangements with Infratil or Alliant then it could vote at the special meeting.

The panel's concluding remarks had real teeth. It said that if Infratil, Alliant and the Consumer Trust intended to raise their percentage shareholding under the buyback, then they were not in compliance with the code and TrustPower has aided this non-compliance.

It determined that the buyback offer would still close on April 24 and an independent adviser's report be prepared and a meeting of shareholders held at a later date.

But the most important decision was that the public shareholders now have the opportunity to reconsider their decision in relation to the offer. They can either rescind an earlier decision to accept the offer or make a late acceptance up to seven days after the shareholders meeting.

The issue isn't over yet. The panel disclosed that Morrison & Co, which manages Infratil, advised TrustPower on the share buyback. Infratil and Alliant have an investment agreement and pre-emptive rights over each other's shareholding.

In a letter lodged with the Stock Exchange on March 26 the two parties indicated that they would raise their combined TrustPower holding from 46.8 per cent to more than 50 per cent. There is a possibility that this will exceed 60 per cent after the buyback.

Tauranga Energy Consumer Trust, which is expected to hold between 30 and 35 per cent after the buyback, would be disadvantaged if AGL sells out and the Infratil/Alliant consortium gains majority control.

Because of this the Consumer Trust is expected to challenge the right of AGL to vote at the meeting. The appeal will probably be based on the argument that AGL is a related party to Infratil and/or Alliant.

If the Consumer Trust, or any other shareholder, appeals the right of AGL to vote it will challenge the panel's ability to uphold the integrity of the code. The panel has shown that it is well and truly up to the task.

* Email Brian Gaynor