Private companies must be aware of takeover restrictions

POSTED BY Andrew Wallace
05 April 2012

posted in Business | M&A | Legislation



Many people don’t realise that the rules governing takeovers can apply to private companies – that is, companies that aren’t listed on the NZX.

The rules, which are set out in the Takeovers Code, are there to provide a clear process for the acquisition of voting rights in "code companies”, to provide protection for minority shareholders and to promote market confidence. The fundamental rule is that you can’t become the holder or conttroller of voting rights in a code company if you and your associates would control more than 20% of the voting rights, or increase an existing holding above 20%, other than in compliance with the Code.

Initially, the Code applied to listed companies, and private companies that had 50 or more shareholders and $20 million or more in assets. In 2006 the assets threshold was removed, which meant that the net was cast wider and any company with 50 or more shareholders was (and is currently) caught, regardless of its size.

One way that people have been caught out is where shares are held jointly. Contrary to what you might expect, the number of shareholders is arrived at by counting each name on the company’s share register. So, if a parcel of shares is held by three trustees of a family trust, that counts as three shareholders rather than one. Another way has been where a company has non-voting shares on issue, for example where you have silent investors who are given non-voting preference shares. The holders of these shares are included in the test even though the Code is designed to deal with voting power. These issues have meant that it is fairly easy for a private company to tip over the threshold and become subject to the Code.

Private companies can also run into other difficulties under the Code which the Takeovers Panel discusses in its latest newsletter – available from

Because of the costs involved, it can be impractical for private companies that are subject to the Code to raise funds from new or existing shareholders, or otherwise change their capital structure in compliance with the Code.

Fortunately, officials have recognised that the current regime is broader than it needs to be to achieve its policy objective. 

Under the Regulatory Reform Bill that’s currently before Parliament it’s proposed that: 

  • Private companies will only be subject to the Code where they have 50 or more shareholders and 50 or more share parcels. Joint holders will be counted as holders of a single parcel of shares under the test.
  • Holders of non-voting shares will be excluded from the test.

What will the changes mean for you? Companies no longer subject to the Code will be able to raise funds and make changes to their capital structure in a more cost-effective manner. Generally, this should benefit all shareholders, and shareholders should also have greater freedom to increase their shareholdings. However, for minority shareholders it will also mean losing the protections they currently enjoy under the Code.

For companies that remain subject to the Code, it will be business as usual for them and their shareholders. Those companies will have to consider the implications of the Code whenever shares are proposed to be transferred or issued.

The Bill had its second reading in Parliament this week. There’s a clear need for the changes and they have been working through the process for a few years now, so it’s hoped that they’ll become law without much further delay.

POSTED BY Andrew Wallace
05 April 2012

posted in BusinessM&ALegislation



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