New regulations target low-ball share offers

Lowball Offers 6 Nov6 November 2012

New regulations target low-ball share offers
Introduction
At the end of last week the Government announced the introduction of new regulations aimed at protecting the public against unsolicited (low-ball) offers for securities.
The new regulations are made under the Securities Markets Act 1988 and come into force on 1 December 2012.
Low-ball offers are unsolicited approaches to shareholders offering to buy their shares or other securities. Typically, low-ball offers put pressure on investors to sell their shares quickly, and are often accompanied by little information and use unconventional business practices.
The new regulations are a response to a series of low-ball offers made by interests associated with Bernard Whimp in late 2010. Since then there have been a number of copycat offers. As a result of calls by a number of listed companies, the Law Society and others, the FMA and MED officials began working on a legislative response – that initially took the form of changes to Securities Markets Act which were made in April 2011.
Low-ball offers damage the health of our capital markets by underlining the confidence of both local and overseas investors. As a result, the new regulations govern how unsolicited offers can be made and protect shareholders from misleading offers – by requiring greater disclosure from the person making an offer, and providing stronger rights and remedies for shareholders. The new regulations include:
• Setting minimum information requirements including stating the market price (or a fair estimate of the value of the shares); and
• Specifying a minimum offer period and a cooling-off period.
Summary
The new regulations apply where the offeror (or any of their associates) has made or intends to make unsolicited offers on the same or substantially similar terms to 20 or more other people in the 6 month period following the first unsolicited offer.
Significantly, there is a reversal of the onus of proof so that, if a subsequent unsolicited offer is made, it will be presumed that the intention was to make that unsolicited offer at the time the first unsolicited offer was made unless the offeror can prove the contrary.
Offeror must give prior notice
The offeror must give written notice to the issuer of intention to make an unsolicited offer at least 5 (but not more than 10) working days before the unsolicited offer is made.
The notice of intention must be accompanied by:
• a copy of the standard disclosure document that will be given to the offerees (excluding information relating only to a particular offeree);
• a list of the names and addresses of every offeree to whom the disclosure document will be given; and
• a list of the names and addresses of every other person to whom the offeror or an associated person of the offeror or both have made, are making, or intend to make an unsolicited offer on the same, or substantially the same, terms in the period that begins 6 months before the date of the offer and ends 6 months after that date.
Disclosure document
The disclosure document must include the following information:
• the price the offeror is offering;
• for listed securities – the current market price (and a fair estimate of the value for unlisted securities);
• the total consideration that the offeror is offering;
• the total current market price of the securities as at a point in time specified in the document (not earlier than 10 working days before the date of the offer);
• for listed securities – details of the website of the registered exchange (typically NZX) on which the issuer is listed and the securities are quoted – and a statement that the offeree may check the current market price of the securities on that website and in the media;
• for unlisted securities – the basis for making the value estimates and whether they have been reviewed by an independent third party;
• how and when the payments will be made (and, if by instalment, the amount of each instalment – along with certain health warnings); and
• the date by which payment will have been made in full.
The offer period
The restrictions on the offer period are:
• it must be not less than 30 days and no more than 12 months; and
• offers can be withdrawn only with the consent of the FMA and the terms of the offer cannot be varied.
In addition, an offeree has a cooling-off period enabling them their acceptance of an unsolicited offer by giving notice within 10 working days of acceptance, and by repaying any consideration received.
As a result, low-ball offerors will no longer be able to put investors under pressure by making offers that are described as being on a “first come, first served” basis. Instead, all offerees will have at least 30 days to consider the offer.
Enforcement
The 2011 amendments to the Securities Markets Act give the FMA powers to require the makers of low-ball offers to attach a health warning to offer documents.
If a person has acted, is acting, or intends to act in contravention of an unsolicited offer obligation, the FMA may make certain orders under the Securities Markets Act preventing the transfer of securities under an unsolicited offer. In addition, certain civil remedies are available under that Act in the event of a contravention (including a pecuniary penalty and a compensatory order). A person who does not comply with an order made by the FMA commits an offence and is liable on summary conviction to a fine not exceeding $30,000.
Concluding comments
The new regulations have been a long time in their gestation and, in the interim, there have been far too many examples of a practice that regulators in Australia clamped down on some time ago. This, and the abuses by the likes of the late (unlamented) Nathans Finance in getting access to share registers for nefarious purposes, have been the subject of comments by myself and others over a period of years.
As a result, it is pleasing to see the new regulations, along with new measures in the Financial Markets Conduct Bill, will prevent the use data from share and securities registers for reasons that are unrelated to the securities in question, finally being implemented to put a stop to such abuses. In addition, the FMA has shown a willingness to use these powers to prevent practices that, if allowed to continue, would undermine confidence in our capital markets.
The new regulations also provide investors with much clearer disclosure, as well as a reasonable time period within which to consider an unsolicited offer and to obtain suitable financial advice – rather than being pressured into hasty decisions.
If you would like more information about the new regulations, please contact me.