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Under the Takeovers Code (Code), a person and their associates are prohibited from becoming the holders or controllers of 20% or more of the voting rights in a company with 50 or more shareholders and 50 share parcels (Code Company), except in a manner permitted by the Code.

The Takeovers Panel has now granted a new class exemption (Exemption) allowing small Code Companies, being unlisted companies with $20 million or less in total assets (Small Code Companies), to issue shares without the need to observe the "fundamental rule" in the Code.  This rule prevents a person from becoming the holder or controller of 20% or more of the voting rights in a Code Company except in accordance with the Code, being by making a full or partial offer, by shareholder approved acquisition, via the 5% creeping exception or by compulsory acquisition for holdings of 90% and above.

The purpose of the Exemption is to reduce the disproportionate cost barriers to capital raising for Small Code Companies.  These include the costs of holding a shareholders' meeting to approve the relevant share issue, obtaining an independent adviser's report and associated legal compliance costs.

The costs associated with complying with the Code can be significant, which can potentially deter and restrict investment in Code Companies.

The Exemption only applies to increases in voting rights in Code Companies resulting from the issue of shares.

For example, if a shareholder holds or controls 15% of the voting rights in a Small Code Company and wishes to increase its holding above 20% by subscribing for new shares, the Exemption allows that shareholder to complete the subscription otherwise than in accordance with the Code.  Similarly, the Exemption would permit an angel investor or venture capital firm wishing to subscribe for more than 20% of the voting rights in a Small Code Company to avoid the costly Code compliance process.

The Exemption is subject to the Small Code Company meeting certain conditions, namely:
  • The board must have previously resolved to opt out of the Code in respect of the share issue, and it must be in the best interests of the company to do so.
  • Within 28 days of the board resolution, a disclosure document must be sent to the Takeovers Panel and each holder of voting securities in the company.
  • During a minimum 21 day objection period, which starts on the date the disclosure document is sent to shareholders, written notices objecting to the opt out must not have been received from the holders of 5% or more of the company's free float (being all the company's voting securities, less those held by the person to whom the new shares are proposed to be issued, and their associates).
  • The share issue must be made after the end of the objection period and within 90 days of the board resolution.
Small Code Companies seeking to raise further capital will welcome the Exemption because it will significantly reduce the costs associated with doing so.

However, the procedure involved with complying with the Exemption creates a new (albeit less onerous) barrier for companies wanting to move quickly to raise new capital (in particular, the disclosure document and minimum 21 day objection period).  Procuring new capital as a matter of urgency can be important for Small Code Companies, and the Exemption will provide little relief to companies in these situations.  

It is therefore likely that many Small Code Companies (especially those looking to raise capital by crowdfunding) will continue to adopt shareholding structures that avoid the application of the Code, such as non-voting or limited-voting share structures or nominee arrangements.

The Exemption also does not apply to share transfers and share buybacks, with the Code continuing to apply for these types of change of control transactions.  It is hoped by us and many others in the marketplace that the Takeovers Panel will in the near future introduce an exemption to cover off acquisitions of this nature to further reduce the regulatory burden that the Code currently imposes on Small Code Companies.
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