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UPDATE: Diligent's Kiwi retail shareholders ask 'why sell now' as US takeover offer approved

Wednesday 13th April 2016

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New Zealand retail shareholders, many of whom voted against a successful takeover of US-based, NZX-listed Diligent Corp, say they still want to know why the board and management were hell-bent on selling the company just when it had started showing strong momentum.

More than 90 percent of shareholders – only 40 percent of which are New Zealand-based - voted in favour of the takeover deal which will see the software-as-a-service company, a global market leader in selling corporate governance software, delist from the NZX tomorrow after a decade. It will be replaced on the S&P/NZX 50 Index by natural health products company Comvita.

Several Kiwi shareholders spoke out in opposition today to the takeover which the New Zealand Shareholders Association, holding proxies on behalf of shareholders, voted against.

The takeover process was based on US law which requires 50 percent of shareholders on the register to accept the deal at which point the buyer can compulsorily acquire the rest of the shares. The threshold in New Zealand is 90 percent.

Under the terms of the deal, Diligent shareholders will receive $7.39 (US$4.90) in cash per share, valuing the company at $941 million and at a 31 percent premium to the pre-announcement share price.

The company’s most recent accounts in February for the 2015 financial year showed gross profit rising 19 percent to US$77.9 million on the prior year while revenue lifted 20 percent to US$99.3 million.

NZSA chair John Hawkins said if the company has such great prospects, why would shareholders not want to be part of that journey instead of being forced to sell for a low offer that takes advantage of a share price dip.

“This board and management team seem hell-bent on selling the company. Why? Could it be that the very large windfall that various executives and some board members are reported to stand to make has coloured their thinking?” he said.

“What has happened to boards acting in the best interests of the company and by extension the shareholders. Or is the American way to say ‘to hell with small shareholders, let’s get rich ourselves’ – something I would call the Donald Trump approach.”

Diligent chair David Liptak, whose company Spring Street is the largest shareholder with a 22 percent stake, said the board had done an exhaustive five-month sales process and the Insight Ventures offer was the best it received.

He said all shareholders were treated the same under the deal which was settled at a premium multiple compared to recent sales of comparable companies.

The proxy statement shows directors and executives officers owned around 10.4 percent of outstanding common shares and 24.7 percent of common and preferred shares, but in addition had a number of options granted under share plans which, if exercised, boosted what they received from the deal.

Liptak was said to realise US$130 million on completion of the merger while other directors got in the range of US$91,000 to US$683,000 and chief executive Brian Stafford got US$551,000.

The board’s view was that it was better to sell now while the company had momentum and a leading market share rather than when it started declining, Liptak said.

“You get a better price when you’re in this position. People have to make risk-adjusted decisions that consider what could happen if the outcome is not so positive.”

He also rejected criticism that executives were incompetent after several corporate governance issues that earned it NZX reprimands.

“When Santa Claus comes down the chimney and knocks a few woodchips off the fireplace I think investors should be looking at the presents, not a few woodchips lying around,” Liptak said. “They should focus on the success of the company. This has grown from a US$2 million revenue company when listed to a US$100 million company and you don’t see that happen that often.”

NZSA’s Hawkins said adding insult to injury, the board had done a deal which guaranteed the worst taxation outcome for its large number of small Kiwi retail investors. Investors not subject to the foreign investment fund regime – typically with less than $50,000 invested overseas – will be taxed on the total income received from the deal at full marginal tax rates.

“In this regard, the Diligent board has not only failed, but you have shown absolute contempt for small shareholders, the very people who stood by the company when it was in difficulties,” he said.

Liptak argued the structure was common under US takeover law and given Diligent had shareholders in several tax jurisdictions, it couldn’t structure the deal in a way that would suit everyone. It’s a global company with over 3,500 customers in more than 60 countries.

He said the obvious answer was for small shareholders to avoid the tax by selling before the takeover deal was voted on. Harbour Asset Management reduced its stake from 10.7 percent to 4.7 percent ahead of today’s vote, with managing director Andrew Bascand previously criticising the offer as opportunistic.

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