Takeovers Code – Huge penalties for misleading statements

Takeover participants, including bidders, advisors, shareholders and media commentators, face huge penalties for breaches of the new “misleading or deceptive conduct” Code regulations that come into force on 29 February. The penalties are:

- For individuals up to 5 years in jail or a fine of up to $300,000 or both
- For a body corporate a fine of up to $1 million can be imposed.

Misleading or deceptive conduct will be prohibited under a new Rule 64. This rule is included in Part 8 of the Code under the heading “Market Manipulation”.  Rule 64, which applies to bidders, target companies, major shareholders and any other persons, will have a broad application as it is based on Section 9 of the Fair Trading Act 1986, which prohibits misleading and deceptive conduct in trade.

Under the new regulation market participants involved in a takeover or other Code related transactions will have to take care if they make representations to the media or to the market.

The Panel notes that “conduct may be found to be misleading or deceptive even if it was not intended to mislead or deceive”.

The new rules could have an impact in a number of areas, including the following recent offers:
- Bidders should not be able to state or give the impression that they are not going to raise the offer price and then make a higher bid shortly after the previous one lapses (Carter Holt Harvey and CanWest MediaWorks)
- Companies that are defending an offer will have to be careful about what they say regarding the prospects of an alternative bid (Abano Healthcare)
- When major shareholders make positive or negative comments about an offer they will have to support these comments by either accepting or rejecting the bid (Auckland International Airport)
- Broker analysts will not be able to write that a bid is fair or is undervalued and their company then recommends to clients (both discretionary and non-discretionary) the opposite course of action
- All comments to the market and media – including statements by media commentators – will have to be carefully considered to ensure that they are not misleading or deceptive.

The Panel will place a strong emphasis on the last and final statement.  For example the bidder must either state that “the offer price will not be increased” or qualify this with a comment such as “at present the offeror does not intend to increase the offer price, but it reserves the right to do so”.
 
The new regulations will bring a greater level of clarity to takeover offers and they should be effective because of the large potential penalties, particularly for individuals.

Brian Gaynor, 17 December 2007