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Offers of Securities in Takeover Bids

APPENDIX B - DETAILS OF PROPOSAL TWO

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)

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".
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.
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.
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

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)

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

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

Clause 10

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.
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.
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.
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

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

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.
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.
For these reasons it seems that this particular provision may be an appropriate subject for an exemption.

Proposal

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
3. 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

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)

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.
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

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

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.
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

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

Clause 8

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.
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

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
3. 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

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

Clause 2 specifies that the investment statement must provide "[a] brief description of the securities being offered".
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

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?"

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?"
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

Clause 5 of Schedule 3D provides disclosure of the monies payable by subscribers to the issuer in respect of the securities.
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.
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

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:
1. - Exchange of securities
  A brief description of the terms of the exchange of securities, including:
  
  the proportion of each target company shareholder's shareholding that the offeror wishes to acquire; and
  
  the number of securities that the offeror is offering as consideration in return for target company shares, expressed as a ratio; and
  
  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

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;
3. an exemption from clauses 2; 5; and 6 of Schedule 3D to the Securities Regulations.
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