NZX Regulation has confirmed that it will not take any further action against issuers who breached the 2017 Listing Rules because of a “prevailing misinterpretation” in relation to rotation requirements for Managing Directors – since clarified in the 2019 Listing Rules update. This update follows a case study released by NZX Regulation on this topic in October 2018, highlighting a New Zealand Markets Disciplinary Tribunal determination that a listed issuer had breached these rules.
We commend NZX Regulation for reaching a pragmatic and sensible conclusion in this matter, given the technical nature of the breaches and the lack of quantifiable harm identified to investors.
Helpfully, the position has been put beyond doubt under the 2019 Listing Rules, with the simple rule that all directors must retire, but may seek re-election, after three years or the third annual meeting, whichever is longer, since their most recent election or re-election.
When were Managing Directors required to retire?
Under the 2017 Listing Rules, Managing Directors were exempt from retiring by rotation in the ordinary course under Rule 3.3.11 and 3.3.12 (which required at least one third of the directors to retire by rotation at each annual meeting). However, under Rule 3.3.9, a Managing Director’s term of appointment could not exceed five years, but he or she can be re-appointed at the end of that term.
As noted by NZX Regulation, it was common for the constitutions of listed issuers to provide a right for the board to re-appoint a Managing Director at expiry of his or her five year term for a further five year term.
Under Rule 3.3.6, a director appointed as a director by the board is required to retire at the next annual meeting, but is eligible for re-election at that annual meeting.
The New Zealand Markets Disciplinary Tribunal and NZX Regulation concluded that, taking into account the interplay between the relevant rules, the correct position was that a Managing Director who is re-appointed by the board at the end of his or her five year term is then required to retire, but may stand for re-election, at the next annual meeting.
As noted by NZX Regulation, there was a “genuine, widespread misunderstanding” as to how the rules should be interpreted. The practice adopted by some issuers was that re-appointment by the board of a Managing Director did not trigger Rule 3.3.6, and such Managing Director remains exempt from the rotation requirements under Rule 3.3.12, so shareholder approval was not required following the re-appointment of such directors nor was it required at future annual meetings.
NZX Regulation has noted three points which issuers should bear in mind if they have, or are considering appointing, a Managing Director:
- NZX Regulation has noted that the decision not to take any further regulatory action only applies where an issuer has relied upon this prevailing misinterpretation. If issuers have taken an unorthodox (but still non-compliant) approach, NZX Regulation may investigate further.
- Under the class rulings and waivers granted to facilitate transition to the 2019 Listing Rules, any executive director who has held office without re-election for more than three years or the third annual meeting, whichever is longer, since their most recent election or re-election will be required to retire but may seek re-election at the next annual meeting of the issuer.
- Any non-compliance with the 2019 Listing Rules retirement requirements for executive directors will be subject to investigation and enforcement action, as appropriate.
We support the change made to the 2019 Listing Rules to simplify the rotation and retirement requirements for directors. Ultimately, if a board is concerned that a Managing Director may not be re-elected by shareholders every three years, it would suggest that there are more serious issues that need to be addressed by the board and the issuer.
Issuers who are concerned that they may have breached the 2017 Listing Rules in relation to Managing Directors should contact us to discuss the best way to remedy the situation.
A more general lesson going forward for issuers is that they should seek advice, and not be afraid to engage with NZX Regulation, on interpretation questions under the 2019 Listing Rules.