Takeovers Code - Exemption for Small Code Companies

POSTED BY Michael Busch
29 July 2015

posted in Business | Crowdfunding



The Takeovers Panel has granted a class exemption allowing small code companies to issue new shares, without needing to first obtain shareholder approval, in circumstances where the issue would otherwise breach the fundamental rule in the Takeovers Code (Code). The fundamental rule prohibits a person (together with his or her associates) from holding or controlling more than 20% of the voting rights in a code company[1] except where permitted under the Code - ie with prior shareholder approval where that arises from a share issue. The exemption permits, for example, a shareholder holding 18% of the voting shares in a small code company being issued voting shares which take their aggregate holding to 22% without the need for prior shareholder approval and an independent advisor's report.

The exemption only applies:

  • to small code companies, being unlisted code companies with $20 million or less in total assets on a group basis; and

  • to share issues.

The exemption does not apply to takeover transactions, acquisitions of existing share parcels, change of control of such parcels, or share buybacks.

The purpose of the exemption is to lower disproportionate cost barriers to capital raising by these companies (including costs of holding shareholder meetings to approve an allotment, obtaining an independent advisor’s report, and obtaining legal advice).

The exemption only applies if the company first meets two main requirements:

  • First, the company’s board must resolve:

    • to opt out of the Code in respect of the relevant share issue; and
    • that, in its opinion, opting out is in the best interests of the company.

  • Secondly, the company must have given shareholders a disclosure document (containing prescribed disclosures) and an opportunity to object to the opt out and require full Code compliance.

If holders of 5% or more of the company’s free float (being the holders of all of the company’s voting securities, less those who will rely on the exemption to increase their holdings in the company (together with their associates)) object to the opt out, the issue can proceed only if it is done in full compliance with the Code.

This exemption will likely be welcomed by companies seeking to raise capital by taking advantage of the new crowd funding exclusions from disclosure under the Financial Markets Conduct Act 2013 (FMCA). While such companies could still become a code company by reason of a crowd funded capital raising, the exemption will give those companies the freedom to opt out of Code compliance in respect of subsequent capital raisings where that compliance would otherwise require shareholder approval and the production of an independent advisor’s report. Such companies will need to be aware of the other implications of becoming a code company and an FMC reporting entity under the FMCA. Legal advice should be sought in this regard.

[1] Being (broadly) a listed company or a company with 50 or more shareholders (holding voting shares) and 50 or more share parcels.

POSTED BY Michael Busch
29 July 2015

posted in BusinessCrowdfunding



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