What the changes to Takeovers Code mean

 THE new restriction to company acquisitions and takeovers analysed by Michael Sullivan of PNG law firm, Leahy Lewin Nutley Sullivan Lawyers, with Anthony Latimer, Steve Johns and Steven Moe of Norton Rose Fulbright Australia. 

THE new ‘national interest’ restriction reads as follows:

“The Securities Commission shall issue an order preventing a party from acquiring any shares, whether partial or otherwise under this code, … if the Commission views that such acquisition or takeover is not in the national interest of Papua New Guinea.”

Although the drafting is unclear, the amendment appears to target all acquisitions made under the Code, including full offers made under Rule 6; partial offers made under Rule 7; allotments and acquisitions in Code companies approved by shareholders and made under Rule 5; acquisitions of less than 5% of the shares in any Code company in any 12 months permitted under Rule 5; acquisitions by persons having a relevant interest in 90% or more of the voting shares in a Code company under Rule 5; and compulsory acquisitions of shares in Code companies made under Rule 21.

Who it applies to

Orders made by the Securities Commission apply to any person seeking to acquire shares.

The amendment also prohibits any person involved in the takeover (including, for example, brokers and registrars) taking any action in contravention of any order made by the Securities Commission. The amendment is not limited to takeovers of PNG companies by foreign entities.

The amendments also potentially apply to takeovers by PNG residents of PNG companies. On a literal reading, the amendment could also apply to takeovers of foreign companies registered in PNG. 

However, as a general rule, PNG legislation does not apply outside PNG.

What is ‘national interest’?

There are no guidelines or formal tests for determining what is in the national interest of PNG or when a takeover or other acquisition of shares will be deemed not to be in PNG‟s national interest. 

In short, the Securities Commission is left with a wide discretion to decide when or if a takeover is not in PNG’s national interest.

Despite this, in our view, the factors the Securities Commission is likely to consider in determining if an acquisition of shares is not in PNG‟s national interest (among other things) may include the dilution of any PNG shareholders or shareholder interests, reduction in market liquidity, potential for job losses at the company, potential delisting from a national or international exchange, and loss of local ownership of the company assets.

Impact on PNG companies

The impact of the amendment on PNG companies and foreign investment in PNG is unclear. However, the amendment has already been used to block one transaction – the partial offer by Kulim (Malaysia) Berhad for shares in New Britain Palm Oil Limited.

In our view, it is likely that unless the PNG Government provides clear guidance as to what the national interest test is and how and when the Securities Commission will apply it (including introducing materiality guidelines and a process for obtaining prior approval of a proposed takeover, if required), the amendment and the uncertainty it creates will discourage foreign investment in PNG and PNG companies.

In our view, it is also likely that the amendment will, in the short term at least, have a negative impact on the share price of PNG-listed companies, as investors begin to price in the effects of the amendment. 

These issues in turn are likely to adversely impact the further growth and development of the Port Moresby Stock Exchange.

What is a Code company?

Any company (including foreign companies) registered or deemed to be registered under the PNG Companies Act, 

• that is a party to a listing agreement with a stock exchange (or was a party to a listing agreement any time during a relevant 12 month period); or
• with assets exceeding K5 million, more than 25 shareholders and more than 100 employees; or
• that the Securities Commission believes on reasonable grounds has met the requirements of the preceding paragraph at any time since the date of the last annual return and audited financial statements submitted by the company and the commission has declared to the company and published a notice in the National Gazette that the company is being treated as a Code company under the Code. – Business Advantage PNG