Bernard Whimp has provided the Financial Markets Authority (FMA) with an easy first scalp in Financial Markets Authority v Carrington Securities LP and in the exercise of its new powers to deal with predatory low ball offers.
This is a good result for the FMA as it seeks to win public confidence in the new regulatory regime.
The litigation related only to the most recent offers made by Whimp. These offered a price higher than the current share price but with payment spread over ten years in equal annual instalments. During that time, any dividends would go to Whimp.
The offered price was headlined at the front of the offer together with a favourable comparison to the recent market price on NZX and emphasis on the ‘first in first served’ limited period for the offer. Other important terms (including the spread payments) were set out in much smaller print on the reverse side of the document.
An earlier interim court order had required Whimp to send notices to all accepting shareholders requesting that they affirm their agreement to sell. Seventeen affirmations were received by the FMA and 132 by Whimp (notwithstanding that the order required that they be sent to the FMA).
In addition to the court proceedings, the FMA also used its new power under section 49 of the Financial Markets Act to require Whimp to disclose to potential ‘investors’ specific warning notices issued by the FMA in any future unsolicited offers.
The FMA’s second cause of action in relation to misleading aspects of low-ball offers sent by Whimp before Christmas has been adjourned for later determination.
The FMA argued that the deferred payment offers breached section 13 of the Securities Markets Act 1988. Section 13 prohibits conduct, in relation to any dealings in securities, that is misleading or deceptive or is likely to mislead or deceive.
It is not necessary to prove either that the deception was deliberate or that anyone was actually deceived by it (although the Court was clear that both were manifestly present in this case).
The Judge, Gendall J, found that the offers were misleading because they created the impression that full payment would be made immediately or promptly and that the offer price exceeded the current share trading price. Further, the offer document did not convey clearly:
“that the consideration for the acquisition of the shares was, to the extent of 9/10ths an unsecured loan to Limited Partnerships about which no information was given”.
The Judge drew heavily on the Australian decision in National Exchange Pty Ltd (ACN 006 079 974) v Australian Securities & Investments Commission, noting that Whimp must have based his strategy on the offers at issue there (from David Tweed, Whimp’s Australian equivalent) so similar were they in structure.
Orders were granted against Whimp and those limited partnerships he used in the offers restraining them from making any like offers in the future. In relation to the offers already made, and except where the shareholders had affirmed their intention to proceed, the Court voided the sales by:
- cancelling the contracts
- directing the return of any shares that had been transferred, and
- restraining the registration of any shares acquired.
The defendants were also required to produce copies of the affirmations they had received so that the FMA could make further inquiries to confirm their validity.
The FMA’s new powers
Although the Government has decided against introducing a “proper purpose” test for access to share registers for the moment, recent changes to the Securities Markets Act should inhibit future unsolicited offers. These include:
- the FMA’s power to require that offerors include a warning statement from the FMA at the beginning of unsolicited offer documents. Such statements will typically suggest questions which investors should consider (How much will you receive per share? When will you get paid? Who is making the offer?) and will warn them that, if they accept the offer, they may receive less than if they sold the shares through a sharebroker, and
- the power to make regulations. The Government has not yet used this regulation-making ability but could use it to set rules such as requiring that the market price be quoted in the offer document, or a fair estimate of value for an unlisted security, and requiring a ‘pause period’ before acceptances can take effect.
Whimp’s announcement of his “retirement” within days of these new provisions being passed into law suggests that the FMA has the tools to put him and others like him out of business.