Under the Takeovers Code (Code), a person and
their associates are prohibited from becoming the holders or
controllers of 20% or more of the voting rights in a company with
50 or more shareholders and 50 share parcels (Code
Company), except in a manner permitted by the Code.
The Takeovers Panel has now granted a new class exemption
(Exemption) allowing Small Code Companies, being
unlisted companies with $20 million or less in total assets
(Small Code Companies), to issue shares without
the need to observe the "fundamental rule" in the
Code. This rule prevents a person from becoming the holder or
controller of 20% or more of the voting rights in a Code Company
except in accordance with the Code, being by making a full or
partial offer, by shareholder approved acquisition, via the 5%
creeping exception or by compulsory acquisition for holdings of 90%
PURPOSE OF THE EXEMPTION
The purpose of the Exemption is to reduce the disproportionate
cost barriers to capital raising for Small Code Companies.
These include the costs of holding a shareholders' meeting to
approve the relevant share issue, obtaining an independent
adviser's report and associated legal compliance costs.
The costs associated with complying with the Code can be
significant, which can potentially deter and restrict investment in
APPLICATION OF THE EXEMPTION
The Exemption only applies to increases in voting rights in Code
Companies resulting from the issue of shares.
For example, if a shareholder holds or controls 15% of the
voting rights in a Small Code Company and wishes to increase its
holding above 20% by subscribing for new shares, the Exemption
allows that shareholder to complete the subscription otherwise than
in accordance with the Code. Similarly, the Exemption would
permit an angel investor or venture capital firm wishing to
subscribe for more than 20% of the voting rights in a Small Code
Company to avoid the costly Code compliance process.
The Exemption is subject to the Small Code Company meeting
certain conditions, namely:
The board must have previously resolved to opt out of the Code
in respect of the share issue, and it must be in the best interests
of the company to do so.
Within 28 days of the board resolution, a disclosure document
must be sent to the Takeovers Panel and each holder of voting
securities in the company.
During a minimum 21 day objection period, which starts on the
date the disclosure document is sent to shareholders, written
notices objecting to the opt out must not have been received from
the holders of 5% or more of the company's free float (being
all the company's voting securities, less those held by the
person to whom the new shares are proposed to be issued, and their
The share issue must be made after the end of the objection
period and within 90 days of the board resolution.
Small Code Companies seeking to raise further capital will
welcome the Exemption because it will significantly reduce the
costs associated with doing so.
However, the procedure involved with complying with the
Exemption creates a new (albeit less onerous) barrier for companies
wanting to move quickly to raise new capital (in particular, the
disclosure document and minimum 21 day objection period).
Procuring new capital as a matter of urgency can be important for
Small Code Companies, and the Exemption will provide little relief
to companies in these situations.
It is therefore likely that many Small Code Companies
(especially those looking to raise capital by crowdfunding) will
continue to adopt shareholding structures that avoid the
application of the Code, such as non-voting or limited-voting share
structures or nominee arrangements.
The Exemption also does not apply to share transfers and share
buybacks, with the Code continuing to apply for these types of
change of control transactions. It is hoped by us and many
others in the marketplace that the Takeovers Panel will in the near
future introduce an exemption to cover off acquisitions of this
nature to further reduce the regulatory burden that the Code
currently imposes on Small Code Companies.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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