Old rules exposed in Montana affair

Economics editor BRIAN FALLOW presents conflicting views on the takeovers code and the much-criticised regime it is about to replace.

The Government has been quick to point to Lion Nathan's takeover of Montana as illustrating the need for the takeovers code which comes into effect on July 1.

In the absence of the code, the rules which governed Lion's acquisition of a majority stake in Montana were the stock exchange's rules governing a stand in the market.

They allow the brokers acting for the acquirer to fill up to 80 per cent of their requirements off-market, in effect from institutional investors, leaving only 20 per cent to be scrambled for by everyone else in a sort of cyber-ruck when the market opens.

The chairman of the Takeovers Panel, John King, says: "You can see the difficulties with stands in the market.

"It is extraordinarily difficult to deal in an even-handed manner on a first-come, first-served basis, just for logistical reasons. One of the things the code does, quite apart from its concepts of equal treatment and fairness, is ensure there is a certain orderliness, too."

But Act MP Stephen Franks says people will be more aggrieved in a few years' time than they are now, because the new law promises things that will be hard to deliver.

Mr Franks, a leading commercial lawyer and former member of the market surveillance panel, was one of the architects of the stock exchange's takeovers regime, which will be superseded by the code.

"You are now promising people equal treatment, where you weren't so ambitious before. The consequence is they will have a legitimate reason to complain if they don't get it [equal treatment]," he says.

He argues that by introducing barriers between willing buyers and willing sellers of parcels of shares, the code will create an incentive for devious behaviour aimed at getting around its provisions, given the large sums of money involved.

It is healthier for a market, he says, to have simple rules rigorously enforced than ambitious ones regularly flouted.

Mr King is more sanguine. "We lawyers sometimes see problems under every rock. The mainstream business world doesn't spend its time in devious approaches to getting around the law. The takeovers code is built around the concept of effective control and sends a very clear message to the market. I think you'd find, in all the sorts of takeovers we see, it has a very straightforward application."

The Government, which campaigned on a promise to bring in the code, has drawn fire over the time it is taking for the code to come into force. It was, after all, drafted in the mid-1990s and its enabling legislation has been in place since then.

The delay reflects, first, the desire to have a further round of consultation with the business community on the technicalities, rather than the substance, of the code, in the light of experience in the seven years since the code was drafted. Some minor changes were made.

Second, the panel has been working on a set of class exemptions, trying to anticipate circumstances in which the provisions of the code might be innocently or inadvertently breached.

An example might be if someone inherited a parcel of shares which took his stake over the 20 per cent threshold that would trigger the mandatory bid rule.

Mr King says a draft set of class exemptions is expected to be released for public feedback early next month.

Finally there is legislation, the Takeovers Code (Implementation and Enforcement) Bill, now before the commerce select committee. The bill amends the functions of the Securities Commission to enable it to provide administrative and support services to the panel.

It also widens the panel's waiver powers, enabling it to grant class exemptions, and authorises the panel to charge fees to recover its costs.