ECM update – April 2019

We comment on the NZX Listing Rule transition process, recent initiatives from the three regulators – NZX Regulation, the Financial Markets Authority (FMA) and the Takeovers Panel – and Bernard Whimp’s latest bout with the courts.

Chapman Tripp partner Rachel Dunne has also been shoulder-tapped to join the widely publicised “Capital Markets 2029” steering group, chaired by Martin Stearne. This industry-led initiative has been tasked to deliver a ten-year vision and growth agenda for the capital markets, with a report due in Q3.

Off to a roaring start

Chapman Tripp has advised Precinct on its $160m placement and retail offer (described as innovative by the New Zealand Shareholders’ Association), Mercury NZ on its $54.7m ‘firm in relief’ commitment to Tilt Renewables’ $274m accelerated entitlement offer, and Moa Group on its equity placement and rights offer to fund its acquisition of the Savor businesses.

A recent regional council update confirms preparations for the Port of Napier Holdings’ IPO and NZX Main Board listing are well‑underway, with similar minority shareholder protections as in the 2013-2014 mixed ownership model.

NZX Listing Rule transitions to date

As at 1 April, 48 issuers had transitioned to the new NZX Listing Rules, well ahead of the 1 July 2019 full commencement date. Four issuers – with 27 quoted financial products, 23 of these NZX Smartshares – have signed up to the new “fund security” listings.

We disagree with the New Zealand Shareholders’ Association (NZSA) criticism regarding the rules applying to managed funds. We think the settings are appropriate and would point out that they are more restrictive on related party transactions than the NZX Main Board equity market rules, and there are equivalent protections in fund governing documents for unit holders in all but the simplest situations.

Vital Healthcare, quoted by the NZSA as a “particularly egregious” example of the application of the new rules, continues to have requirements for continuous disclosure, a minimum of two independent directors, rotation of independent directors, an annual meeting of unit holders and audited annual financial statements and stringent related party rules contained in the Financial Markets Conduct Act 2013.

NZX Regulation Oversight & Engagement Report 2019

NZX Regulation (NZXR) recently published its third Oversight and Engagement Report (the Report), which includes a valuable overview on issuer investigations – in particular in relation to continuous disclosure and administrative announcements and reporting.

Issuer investigations

The NZXR issuer compliance team, responsible for assisting and supervising issuers with compliance of the Listing Rules for the NZX Main Board and Debt Market, conducted 96 investigations in 2018 and identified 31 breaches.

Continuous disclosure obligations

Continuous disclosure compliance made up nearly half of all the NZXR investigations (45 out of 96) but only one breach was found. This compares to six determined breaches from 58 enquiries in 2017. NZXR attributes this improvement to its ongoing education and advocacy work programme, which includes providing training for issuers and working with the FMA to provide investigative and informative reports.

Case study: continuous disclosure of non-financial metrics

The Report references a case study published finalised in June 2018, on a referral by NZXR to the NZ Markets Disciplinary Tribunal (NZMDT 4/2018).

An (unidentified) issuer had reported a 30 percent deviation from forecast on a key performance indicator, which it had specifically emphasised in previous disclosures. NZX considered that the materiality threshold had been triggered and that the market had not been informed on a timely basis so referred the matter to the Tribunal.

The Tribunal noted that there was a lack of documentation of the decisions made by the board such that the directors may not have had effective oversight of their continuous disclosure obligations when the issuer announced the deviation.

It was also concerned that the announcement may be misleading as it referenced the key performance indicator in a positive light to counter other bad news.

The issuer was privately reprimanded, and required to pay $40,000 to the NZX Disciplinary Fund for breach of Listing Rule 10.1.1 (rule 3.1 in the new listing rules).

The case study highlights three key points for issuers.

1. Where issuers select non-financial metrics for their forecasts (such as sales of particular product lines), the obligations relating to disclosure of material deviations from those forecasts will still apply, where that information is material information.
2. Issuers must keep sufficient internal documentation in relation to continuous disclosure discussions and decisions made by the issuer’s board and executive team.
3. Issuers should not attempt to highlight positive information in market announcements as a means to redirect or lessen attention from negative information which is relevant to investors.

Administrative announcements and periodic reporting

The next most common bases for investigation were administrative announcements (26 investigations, 22 breaches) and periodic reporting (six investigations, five breaches).

NZXR identified the majority of breaches in these areas were minor errors found in the contents of periodic reports. With open communication lines under the new simplified Rules, NZXR considers future non-compliance in this area should be limited and inadvertent.

The report notes that global and domestic markets and corporate performance are increasingly volatile and that, historically, volatility has been associated with an increased risk of deficient disclosure. Accordingly, throughout 2019 NZXR will maintain a strong focus on the nature of statements made by issuers to ensure balance in the weight given to negative and positive news.

Another shift NZXR has signalled for this year is from an emphasis on best practice engagement towards more interventionist practices, including more regular use of its powers to refer matters to FMA and to require issuers to amend announcements.

All issuers need to ensure they are actively and adequately considering their disclosure obligations, and that their announcements and reporting are balanced, accurate and not-misleading.

Recent FMA activity: Insider trading

The criminal charges filed against Mark Talbot by the FMA in October 2017 have now been aired in the Auckland High Court, with a guilty plea on one charge. The New Zealand Herald has reported that a broader settlement was reached, although FMA has yet to confirm details.

The case related to the purchase of shares of VMob Group Limited (VMob), now trading as Plexure Group Limited, and provides a valuable reminder to all information insiders – if at all in doubt, don’t trade.

In July 2014, VMob was awarded a large contract with McDonald’s valued at $4.8m over three years. Immediately after the deal was agreed, but before it was announced to the market, Talbot put in a request through one of his investment companies, MST Holdings Limited, to buy shares in VMob. The board chairman denied the request on the basis that Talbot was an information insider.

Talbot accepted this, but failed to disclose that he had purchased a million shares the previous day through Blumau Finance Limited, another investment company in which he was the sole director. In August 2014 the McDonald’s deal was officially confirmed and announced to the market – lifting VMob’s share price from $0.012 to $0.017. Later in October, Blumau transferred its VMob shares to Talbot’s father.

When the FMA began its investigation, Talbot said he didn’t believe the McDonald’s contract negotiations were an impediment to him purchasing shares because he was doing so for his father’s benefit. Eventually however, he filed the necessary disclosure notice and has now pleaded guilty to one representative charge of failing to disclose a relevant interest under the Securities Markets Act.

The FMA had found disclosure failures for some eight purchases and sales of four million VMob shares during 2013 and 2014. Mr Talbot will be sentenced next month.

Takeovers Code

The ‘top up’ relief and sell-down requirements under the Takeovers Code class exemptions for inadvertent or consequential changes arising in the holding or control of voting rights have been extended by the Takeovers Panel making an amendment to the Takeovers Code (Class Exemptions) Notice (No 2) 2001 to allow 12 months (instead of six months) for the pre change holding or control of voting rights to be restored.

The changes were strongly supported by Chapman Tripp, and should facilitate longer term share buyback programmes and reduce compliance cost.

Lowball Offers: Vector sinks teeth into Whimp

Vector Limited has added to Bernard Whimp’s series of losses in the courts by staving off High Court proceedings brought against it by a limited partnership controlled by Whimp for “low-ball” offers made before the 2012 law changes (which, as Chapman Tripp commented, were a direct response to the predatory activities of Whimp and others).

In 2010 and 2011, Whimp had targeted Vector and other listed company shareholders with a mail-out of unsolicited offers significantly below market price via investment companies in his control. Although not illegal at the time, the low-balling tactics were widely considered unethical as Whimp preyed on investor naivety.

In 2016, Whimp sued Vector for refusing to transfer various shares where Whimp had failed to provide the relevant “common shareholder number” (CSN) or the transfer forms had other defects. Whimp withdrew his case one day before a strike-out hearing, and now faces a hefty costs award. Chapman Tripp had advised Vector on its response to the 2011 unsolicited offers and ensuing litigation.

The law now tightly prescribes notice periods, contents of any offer documentation and the offer period for any unsolicited offers being made to shareholders. It also provides FMA with enforcement powers to order correction or seek civil remedies from the Court. This is in addition to its power under the Financial Markets Authority Act to require low ball offers to attach a warning disclosure statement to any offer documents.

The FMA has been making active in the exercise of these powers and also provides guidance for investors on detecting and avoiding low ball offers, including always using a licensed provider and not investing via any offshore or unfamiliar online businesses.

Our thanks to Roger Wallis and Maxine Vercoe for writing this update.