WAV/RULE: PLU: NZXMS Decision - PLU Waiver from Rule 9.2.1

26 Jul 2010 3:13 pm

PLU 26/07/2010 WAV/RULE

REL: 1513 HRS Pulse Utilities New Zealand Limited

WAV/RULE: PLU: NZXMS Decision - PLU Waiver from Rule 9.2.1

23 July 2010

NZX Market Supervision Decision Pulse Utilities New Zealand Limited Application for Waiver from Listing Rule 9.2.1

Background

1. Pulse Utilities New Zealand Limited ("PLU") is Listed on the NZAX market, with an Average Market Capitalisation at the date of this waiver of approximately $12.3 million.

2. PLU proposes to issue up to 5,000,000 redeemable convertible notes ("Notes") for a face value of $1.00 per Note (the "Notes Offer"). Under the issue terms of the Notes, and subject to the election of the holder of the Notes, the Notes are convertible into ordinary shares ("Shares") at an issue price of $0.60 per ordinary Share.

3. The total number of Notes to be issued under the Notes Offer, if converted into Shares, would exceed 25% of the total Shares of PLU currently on issue. This means PLU is not able to make the Notes Offer under NZAX Listing Rule ("Rule") 7.3.5. Accordingly, PLU proposes to authorise the making of the Notes Offer by releasing a pre-break disclosure (the "Pre Break Disclosure") under Rule 10.2 of the Rules.

4. Dene Biddlecombe is the Chief Executive Officer and a Director of PLU. Robert Famularo has a Relevant Interest in approximately 13% of PLU's Shares. Accordingly, Messrs. Biddlecombe and Famularo are Related Parties of PLU under Rules 9.2.3(a) and (b) (the "Related Parties"). Each of the Related Parties (either personally or through family trusts) intends to subscribe under the Notes Offer for at least 100,000 Notes.

5. PLU has confirmed that no legally binding agreements have yet been reached between PLU and the Related Parties for subscriptions under the Notes Offer. PLU has not yet determined the number of Notes that the Related Parties will subscribe for. However, it is possible that Mr Biddlecombe's subscription could be for up to $600,000 in face value of Notes.

6. Rule 9.2.2(b) defines a Material Transaction as a transaction or a related series of transactions whereby an NZAX Issuer issues its own Equity Securities having a market value in excess of 10% of the Average Market Capitalisation of that Issuer. The market value of the Notes Offer is $5 million, and 10% of the Average Market Capitalisation of PLU (as is set out in paragraph 1, above) is $1.23 million. The Notes Offer is therefore a Material Transaction for the purposes of Rule 9.2.2(b).

7. Rule 9.2.1 states that an Issuer shall not enter into a Material Transaction with a Related Party if a Related Party is or is likely to become a party to the Material Transaction, unless that Material Transaction is approved by an Ordinary Resolution of the NZAX Issuer (a resolution passed by a simple majority of votes of shareholders of PLU entitled to vote and voting). Accordingly, Rule 9.2.1 prohibits the Related Parties from participating in the Notes Offer without prior shareholder approval.

Application

8. PLU has approached NZX Market Supervision ("NZXMS") seeking a waiver from Rule 9.2.1, to allow the Related Parties to participate in the Notes Offer without approval by way of Ordinary Resolution from the shareholders of PLU.

9. PLU makes the following submissions in support of its application: (a) Rule 9.2.2(b) expressly provides that where an issue of Securities is made pursuant to Rule 7.3.5 only the market value of the Securities being issued to the Related Party are to be taken into account and not all Securities that are being placed. Allotments under the Notes Offer are of the same nature as a placement under Rule 7.3.5. The Notes Offer will be open for one year and individual subscriptions will be made into the Notes Offer during this time and Notes alloted accordingly. Although the Notes Offer of $5 million is being made through the Pre Break Disclosure procedure in the Rules, PLU considers that would be consistent with the policy of Rule 9.2.1 if the method of assessing the Material Transaction threshold under Rule 9.2.2 is made by reference to the individual placements that occur to Related Parties, as would be the case if the Notes Offer were able to be conducted under Rule 7.3.5.

(b) The terms of the waiver sought are that any Related Party who subscribes for Notes will still be subject to only subscribing for Notes of a value not exceeding 10% of PLU's Average Market Capitalisation (approximately $1.2 million at the date of this application) at the time of that particular issue. Accordingly the granting of this waiver will not allow a Related Party to undertake a Material Transaction with respect to their own subscription(s) into the Notes Offer. Accordingly an identical restriction would apply to that of a placement under Rule 7.3.5, which PLU considers appropriate treatment for the Notes Offer.

(c) Other than Messrs. Biddlecomee and Famularo, it is not currently envisaged that any other Related Parties of PLU will subscribe under the Notes Offer. PLU also notes that recent changes to the Rules have intended to promote investment in Issuers by persons who are Directors such as Mr Biddlecombe.

(d) The terms of the Notes contain only one material difference from the two previous series of Notes offered by PLU. In previous offerings, the conversion price was based on a 10% discount to the volume weighted average price of PLU shares on the 20 business days preceding the conversion date for a convertible note. Under the Notes Offer, the conversion price is fixed at $0.60 per share, representing a 33% premium to the current market price of PLU Shares. PLU considers the terms of the Notes are appropriate, commercial, arms length terms and not representing an inappropriate transfer of value to Related Parties that subscribe for the Notes.

(e) PLU has a strong need for additional cash. The electricity retailer customer numbers for the month of June have recently been released by the Electricity Commission and they show PLU had the highest customer acquisition rate for the month of June of any New Zealand electricity retailer (1,208 new customers for the month). This is very promising news as acquiring customers is of critical importance to PLU's growth but, at this embryonic stage of PLU's business, it conversely increases PLU's working capital requirements. As set out in the Pre Break Disclosure, increased customers require PLU to post higher levels of security with other electricity industry participants and also increases its costs on the wholesale electricity market. Accordingly proceeding with the Notes Offer and having Messrs. Biddlecombe and Famularo participate shortly after the opening of the Notes Offer will significantly ease PLU's short term cash burden which benefits all PLU shareholders.

(f) From a policy perspective aggregating the entire $5 million Notes Offer to constitute a Material Transaction results in an outcome inconsistent with the policy of Rule 9.2.1. It is envisaged that the majority of the Notes Offer will be taken up, over time, by persons who are not Related Parties of PLU. This will therefore dilute the level of interest acquired by Related Parties under the Notes Offer as a whole. By looking at the Notes Offer as a whole to determine whether it is a Material Transaction, allotments to be made to non-Related Parties are effectively counted against allotments made to Related Parties. In fact all issues to non Related Parties will dilute the Related Party holdings.

(g) Given Mr Biddlecombe's intention to subscribe under the Notes Offer, he is interested in this transaction in terms of the Companies Act 1993 and has not approved the terms of the convertible notes as a Director. The two other PLU Directors who have no personal interest in the Notes Offer have approved the terms of the Notes Offer and are making the required certification in the Pre Break Disclosure as per the Rules. Rules 9.2.1 and 9.2.2

10. Rule 9.2.1 provides:

9.2.1 An Issuer shall not enter into a Material Transaction if a Related Party is, or is likely to become: (a) a direct or indirect party to the Material Transaction, or to at least one of a related series of transactions of which the Material Transaction forms part; or (b) in the case of a guarantee or other transactions of the nature referred to in paragraph (c) of the definition of Material Transaction, a direct or indirect beneficiary of such guarantee or other transaction; unless that Material Transaction is approved by Ordinary Resolution of the Issuer.

11. The relevant parts of Rule 9.2.2 provide:

For the purposes of Rule 9.2.1, "Material Transaction" means a transaction or related series of transactions whereby an NZAX Issuer: ...

(b) issues its own Securities or acquires its own Equity Securities having a market value in excess of 10% of the Average Market Capitalisation of that NZAX Issuer, save in the case of an issue pursuant to Rule 7.3.5 where only the value of those Securities being issued to the Related Party or to any Employees (as defined in Rule 7.3.6) of the Issuer are to be taken into account; ...

Decision

12. On the basis that the information provided to NZXMS is full and accurate in all material respects, NZXMS grants PLU a waiver from Rule 9.2.1 to allow the Related Parties to subscribe for Notes under the Notes Offer, without requiring PLU to seek prior approval of its shareholders by way of an Ordinary Resolution, provided the Notes are offered to all subscribers on the same terms.

13. The waiver in paragraph 12 is granted subject to the following conditions: (a) No Related Party of PLU may subscribe for Notes where the value of those Notes being issued to the Related Party have a market value in excess of 10% of the Average Market Capitalisation (as measured at the time of the issue of those Notes) of PLU.

(b) The two Directors of PLU not participating in the Notes Offer, being Messrs. van Wijk and Burcher, certify to NZXMS that:

(i) the terms of the Notes, and the terms on which the Notes Offer is to be made, are fair and reasonable to PLU, and the shareholders of PLU who are not Related Parties of PLU; and

(ii) the terms of the Notes, and the terms on which the Notes Offer is to be made, are in the best interests of PLU and the shareholders of PLU who are not Related Parties of PLU.

Reasons

14. In coming to the decision to grant PLU a waiver from Rule 9.2.1, NZXMS has considered that: (a) The policy behind Rule 9.2.1 is to ensure that the Related Parties do not exercise undue influence or personal connections to reach a favourable outcome or a transfer of value to the Related Party in respect of a transaction and that shareholders are given an opportunity to review transactions where the Board of Directors may have been subject to actual or perceived influence from a Related Party.

(b) In the Pre Break Disclosure the two Directors of PLU who are independent of the Notes Offer, Mr Joseph van Wijk and Mr Richard Burcher, certify that the terms of the Notes Offer:

(i) are fair and reasonable to shareholders of PLU; and

(ii) are in the best interests of the shareholders of PLU.

This certificate, and the certificate in clause 13(b), provide comfort to shareholders of PLU that the terms of the Notes Offer do not provide for an unfair value transfer from PLU to the Related Parties as a result of their Related Party relationships.

(c) The terms on which the Notes are issued under the Notes Offer will be identical for all subscribers for the Notes Offer. As the Related Parties will receive exactly the same terms as all other subscribers under the Notes Offer, allowing the Related Parties to participate in the Notes Offer does not breach of the policy of Rule 9.2.1.

(d) The condition set out in paragraph 13 above will ensure that no Related Party of PLU is able to subscribe for a number of Notes that would breach the 10% threshold contained in Rule 9.2.1. This will ensure that Related Party interest in the Notes Offer remains within the policy of Rule 9.2.1.

(e) It is due to the wide definition of Related Party under the Rules that the Notes Offer is captured by Rule 9.2.1. Where the component of the Material Transaction that is to be directly conducted with Related Parties is measured, the quantum of Notes issued to Related Parties under the Notes Offer falls well below the limit for Related Parties proscribed in Rule 9.2.2(b).

(f) PLU is in urgent need of capital to increase the growth of its business. Requiring PLU to convene a meeting of shareholders to vote on the Notes Offer would create unnecessary financial difficulties for PLU in a situation where the proposed transaction does not infract the policy of Rule 9.2.1.

Confidentiality

15. PLU has requested that this application and the information contained within it be kept confidential pending release by PLU of the Pre Break Disclosure.

16. NZXMS grants PLU's request as it accords with Rules 1.10.2 and 1.10.4 and the footnotes to those Rules. ENDS.

NZX Markets Supervision Decision - Pulse Utilities New Zealand Limited Application for waiver from NZSX Listing Rule 9.2.1 End CA:00197633 For:PLU Type:WAV/RULE Time:2010-07-26:15:13:59

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