Key points

• New Takeovers and Mergers Code in effect from 22 June 2023 and take-over offers under the Act in respect of Code Companies must comply with the Code.
• The fundamental rule prohibits movements in shares from less than 20% to more than 20% or increased movements from 20% or more shares unless an exception applies.
• Exceptions include full offers, partial offers, acquisitions or allotments approved by ordinary resolutions and acquisitions if a person already holds or controls 90% or more of the shares.
• The Code prescribes procedures and requirements that must be followed in respect of an exception.

Background

On 22 June 2023, a new Takeover and Mergers Code (Code) was stated to have been prescribed for the purposes of section 277(1) of the Capital Market Act 2015 (Act).

There has not been a Takeovers Code in place since the former Code was repealed in 2017 which created some uncertainty for companies seeking to undertake takeovers in PNG.

Now that the Code is in place, companies will need to comply with the provisions set out in the Code.

What’s in the Code?

The Code applies to ‘Code Companies’. A Code company is a company that:

• is an entity listed on the PNGX that has quoted equity, debt or convertible securities that confer voting rights on the holder; or
• was a company referred to above at any time in the 12 month period prior to a date or the occurrence of an event referred to in the Code; or
• has 50 or more shareholders and 50 or more share parcels and:
  • where the company has completed one or more accounting periods:
    • the total assets of it and its subsidiaries (if any) are at least K100 million on the last day of the company’s most recently completed accounting period; and/or
    • in the most recently completed accounting period, the total revenue of the company and its subsidiaries are at least K30 million; or
  • where the company has not completed its first accounting period, the company and its subsidiaries has total assets of at least K30 million on the last day of its most recently completed month.

The Code prescribes a ‘fundamental rule’ which prohibits a person who holds or controls:

• less than 20% of the voting rights (including no voting rights) in a Code Company from becoming, with them and their associates. a holder or controller of more than 20% of the voting rights in the Code Company; and
• 20% or more of the voting rights in a Code Company from becoming the holder or controller of an increased percentage of the voting rights in the Code Company,

unless an exception applies.

The exceptions to the ‘fundamental rule’ provide that a person may become the holder or controller of an increased percentage of rights in a Code Company:

• by an acquisition under a full offer made in accordance with the Code. A full offer must include an offer for all securities of the target, including voting and non-voting, not already held by the offeror;
• by an acquisition under a partial offer made in accordance with the Code. A partial offer cannot be made for a listed target company;
• by an acquisition by a person of voting securities in the Code Company or in any other body corporate from one or more other persons if the acquisition has been approved by an ordinary resolution of the Code Company in accordance with the Code;
• by an allotment to a person of voting securities in the Code Company or in any other body corporate if the allotment has been approved by an ordinary resolution of the Code Company in accordance with the Code;
• if the person holds or controls more than 50% but less than 90% of the Code Company and the resulting percentage held or controlled by that person does not exceed by more than 5 the lowest percentage of the total voting rights that was held or controlled by that person in the 12 month period ending on the date of the increase; or
• if the person already holds or controls 90% or more of the voting rights in the Code Company.

The Code then prescribes rules in respect of each type of exception and covers procedural matters such as timeframes, takeover notices, offer documents, target company statements, offer periods, conditions, consideration, director statements and the need for independent reports in specified circumstances.

The Code also contains provisions relating to practices by the parties such as restrictions dealings and defensive tactics (actions that could result in the offer being frustrated or the shareholders being denied the opportunity to consider the merits of an offer), compulsory acquisition provisions where a holder has 90% or more of the voting rights in a Code Company and prohibitions on misleading or deceptive conduct.

Where to from here?

As with any new regulatory instrument, there will undoubtedly be some teething problems while parties work through the new requirements and see if they work in practice. It will be interesting to see how the next PNG takeover plays out and whether the new Code works to foster or inhibit future takeover activity in PNG.