Between the lines: New takeover rules need to be clarified

By JIM EAGLES

It is a delicious - and widely appreciated - irony that the first notice under the new takeovers code was Lion Nathan's sweet-and-sour two-tier offer for Montana.

The situation was made especially piquant for some, and bilious for others, by the offer coming while rival bidder Allied Domecq was temporarily stymied after the Takeovers Panel, as its first act, ruled out an attempt to straddle the change of rules by "irrevocably" offering to buy all of Montana at $4.80 a share. That was despite the Allied offer looking more favourable to small shareholders than the "complying" offer from Lion.

To buy the small number of shares it needs to maintain control, Lion will pay $5.50 a share. But for the other half of Montana's shares its "intention" is to offer only $3.70. All perfectly legitimate but just a little saucy.

Certainly, all of Montana's remaining shareholders will be able to share the premium for control because, under the new code, acceptance will be pro rata. True, the Montana takeover is something of an exception, because most of it has been fought out under the old code. But to judge from public reaction, it was not what critics of the old rules were hoping for.

What this opening case under the new regime has provided is a timely demonstration of the reality that no set of rules can possibly produce outcomes that keep everyone happy.

Buyers and sellers, individual investors and investment funds, small shareholders and controlling shareholders often have different interests. Major shareholders see nothing wrong in looking for a premium for being able to confer control. Small shareholders think any premium should be shared. It is a matter of perspective rather than morality.

The new rules are supposed to have tilted the balance to small shareholders, although the jury is still out on that, especially in light of this initial case.

No matter how carefully the rules are drawn up it will never be easy to constrain aggressive capitalists competing for big stakes - $1 billion in the case of Montana - and having access to the most subtle legal brains in the land. There is nothing immoral about that either, any more than it is immoral for rugby coaches or yacht designers to push the rules to the limit in pursuit of success.

Where real problems do arise is when the rules are an unknown quantity or when people have been given unrealistic expectations of what they can achieve.

There was controversy over changes to rugby's tackled-ball rules because the International Rugby Board failed to ensure that referees, players and spectators had a clear idea of what was allowed.

There is a serious risk of the same thing happening on the sharemarket unless it is made clear how the new rules are going to operate (although a definitive ruling may not come until the rules are tested in court).

The startled reaction to Lion's two-tier offer, which was specifically provided for under the rules, shows the need for a public education exercise on what to expect from the new regime.

If the NZ market is to ever shake off its unwanted and generally unwarranted image as the wild west, people need to have a better understanding of what is legitimate, and why, and what is cheating.

There is also a need to clarify to the players just what they are allowed to do.

The most obvious area where some clear definitions are needed is the confusion created by the Standing Committee's decision in the Montana case over what is allowed to build a book and when a transfer is deemed to have taken place.

Also arising from that decision, it is unclear whether future rulings on market practice will be guided by the precedents set by earlier rulings, or whether they should always go back to the original wording of the code (which, awkwardly, leaves a lot to the discretion of the panel).

The complexity of the new code, with its trigger levels and compulsory provisions, is going to create problems for some otherwise unobjectionable corporate transactions.

The proposal for Singapore Airlines to take its shareholding in Air New Zealand to 49 per cent would seem likely to fall foul of both the requirement for offers to be made pro rata to all shareholders, and for increases in ownership above 20 per cent to go straight to 50 per cent, unless the other shareholders vote for an exemption.

It is unreasonable to expect corporate planners, brokers and investors to operate in an environment where they are not sure what may be permissible.

It is equally unreasonable to expect everyone to wait for test cases to clarify the situation (not to mention the unfairness of expecting a few operators to act as sacrificial lambs).

Is there someone in authority able to perform that function? Or will the market be left suffering a bad case of indigestion or, even more worrying, constipation?