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Regulations designed to make life tougher for low ball offers have been in force in New Zealand for almost 18 months and the evidence suggests that they are beginning to make a real difference.
Two high profile players – New Zealander Bernard Whimp and Australian John Armour – seem to have vacated the market, although whether permanently only time will tell.
Washington Securities Pty Limited, which Armour traded under in 2013, was deregistered in February and no new company directly owned or controlled by him has been registered since, according to the Financial Markets Authority (FMA). FMA is not aware of any offers from Whimp since July last year.
A third player, Zero Commission NZ Ltd, is still active. Zero typically targets small shareholders with offers about 10 percent below market price. FMA knows of 1,275 acceptances received by Zero over nine offers last year at an average total discount to market value of about $45 per investor.
FMA has been monitoring the new system and reported its results in March. Key findings were:
good levels of compliance and strong engagement between FMA and unsolicited offerors, and
a drop in the number of complaints and investor queries to FMA, indicating that the new disclosure requirements are assisting investors to make more informed decisions.
Issuers have been active in trying to frustrate predatory offers.
In response to repeated low ball offers, Heartland Bank obtained FMA exemptions to establish a share sale plan under which investors with 10,000 or fewer shares could sell their parcels at the market price with Heartland picking up the tab for brokerage fees. It did this in August last year after a low ball offer from Washington Securities at a 36 percent discount to the market price of Heartland shares.
And Contact Energy placed a watermark across the share and bond registers it was legally required to provide to persons associated with John Armour, which meant the offeror had to create the shareholder database manually, typing out each name and address, rather than being able to use optical character recognition technology.
This was challenged in the High Court on the basis that the register was not a “copy” as required by the Securities Act, but the challenge was dismissed. The judgment suggested that provided the register is legible, it is open to the company to provide it in whatever form it chooses.
Target companies will be given another line of defence on 1 December this year when the phase two implementation of the Financial Markets Conduct Act 2013 comes into effect. This will require anyone requesting copies of registers to explain why they want them and will ban certain uses. Unsolicited offers are not currently on the banned list but there is scope for it to be expanded by regulations and FMA will have the power to permit issuers to decline register requests.
The FMCA will also make it a civil liability event (allowing for pecuniary penalty orders) to use data from an issuer’s securities register to contact people or send them direct marketing material unrelated to the financial product or to disclose investor details to third parties knowing that the disclosure is likely to be abused.
The Securities Markets (Unsolicited Offer) Regulations 2012
The offeror must give written notice to the issuer at least five and not more than ten working days before the offer is made.
This notice must be accompanied by a copy of the standard disclosure document that will be given to the target shareholders and a list of the names and addresses of every person to whom the offer will be sent.
If the disclosure document is accompanied by other documents, it must be prominently identified and placed to ensure that it will come to the shareholder’s attention.
Disclosure document content
The document must include the following information:
- the price the offeror is offering for each security
- the current market price (for listed securities) and a fair estimate of the value where the security is unlisted
- what the total offer will deliver to the seller and what the market price/fair estimate would deliver
- the website of the registered exchange where the shareholder may check the market price and the identification code of the issuer or (for unlisted securities) the basis for making the value estimates and whether they have been reviewed by an independent and qualified third party
- how and when the payments will be made (and, if by instalment, the amount of each instalment)
- the date by which payment will have been made in full.
The offer period
- must be no shorter than 30 days and no longer than 12 months
- offers can be withdrawn only with FMA consent and the terms cannot be varied
- a shareholder can cancel an agreement to sell by giving notice within ten working days of the acceptance and by repaying any monies received, or simply by repaying monies received within ten working days of acceptance.
FMA can order a correction or seek civil remedies or penalties from the Court. This is in addition to the powers it was given under section 49 of the Financial Markets Act to require low ball offerors to attach a warning disclosure statement to any offer documents.
Tim Tubman and Josh Blackmore are partners at Chapman Tripp specialising in commercial transactions and securities law.