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New NZX rules to strip Vital Healthcare investors of rights

Wednesday 16th January 2019

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New NZX listing rules which Vital Healthcare Property Trust’s manager is proposing to adopt from Friday will wipe out just about all the investor protections that an NZX listing normally provides.

These include rights to have independent directors on the manager’s board, rights to have annual meetings and rights to approve major or related-party transactions.

On Jan. 10, the manager, owned by Canada-based NorthWest Healthcare Properties Real Estate Investment Trust, said it intends to adopt the new NZX rules applying to managed investment schemes from Jan. 18.

Vital has been listed on NZX since September 1999. The new listing rules are aimed at encouraging more managed funds to list on NZX by reducing the requirements they have to meet.

NZX confirms that Vital is a registered managed investment scheme so NorthWest is entitled to adopt the new rules.

NZX says the previous listing rules “were written largely with equity and debt securities in mind” and that the provisions of the listing rules that NorthWest will be exempt from are already covered by the Financial Markets Conduct Act.

“The existing legislative settings under the FMC Act provide a sufficient regulatory regime for funds so duplication by NZX rules is unnecessary – including, for example, related-party transactions,” NZX says in a written answer to BusinessDesk’s questions.

Many of NZX's listing rules that apply to equity securities are also covered by the FMC Act, but neither NZX nor anybody else is seriously suggesting they be scrapped to eliminate duplication.

New Zealand Shareholders’ Association chief executive Michael Midgley says allowing Vital to remain listed under greatly relaxed rules “leads to a false sense of security as to the nature of regulation that applies to a listed vehicle.

“While it may be absolutely legal, good governance requires a higher standard than those that apply here. The manager’s taking a backward step,” Midgley says.

“This substantially takes away many of the checks and balances people would expect to apply” and he expects Vital’s unitholders will be “startled” by the new rules.

NorthWest is on record as wanting to buy properties from ASX-listed Healthscope and has borrowed A$81 million from Vital to buy a 13.4 percent stake in Healthscope at an average price of A$2.36 per share. Healthscope shares are trading at A$2.29.

The new NZX rules came into force from Jan. 1 and only set minimum requirements.

But Andy Eakin, chief financial officer of the manager of New Zealand’s only other listed property trust, Goodman Property Trust, says his company is awaiting legal advice before deciding whether to adopt the new rules.

“We were expecting to continue to be viewed the same as a listed company,” Eakin says.

“We’re aware some others have taken a different view so we’re taking advice about that.”

Section 1.5 of the new listing rules outlines a list of all the rules that no longer apply to issuers of fund securities, but only by section numbers – it’s not until you look up what those sections cover that it becomes clear they cover a swathe of investor protections.

NorthWest will no longer have to abide by rules 2.1 through to 2.14. That covers the make-up of the manager’s board, including rules around independent directors and New Zealand-domiciled directors and Vital unitholders’ rights to vote on directors.

Vital’s five-person board currently has three nominally independent directors, including chair Claire Higgins, and NorthWest has committed to waive its right, enshrined in Vital’s trust deed and endorsed by NZX back in 2007, to fire the independent directors at will until a review of NorthWest’s fees has been completed.

That review is being led by the manager’s full board, in breach of its own board charter which stipulates that such a review be led by the independent directors.

The most recently appointed independent director, Graham Stuart, was elected at the Dec. 21 annual meeting but only because NorthWest, which owns 24.9 percent, or 110.8 million, of Vital’s units, voted all its units in support of his election.

That AGM, which lasted several hours, demonstrated that Vital’s investors are unhappy with NorthWest’s management.

Three of five resolutions put forward by rebel institutional investors ANZ Investment Funds, Mint Asset Management and ACC, were passed outright and all five would have passed if NorthWest had been prevented from voting its units.

However, because of provisions in Vital’s trust deed, none are binding on NorthWest.

Midgley says the unitholders “made their opinion pretty damn clear. In no way can any of this be called good governance. This action basically makes a mockery of all the comments that were made at the meeting to placate the unitholders.”

NorthWest will also be exempt from NZX rules 3.5 to 3.10 which relate to reporting of results and what needs to be included in the annual report.

However, new provisions relating specifically to listed funds, rules 3.11 and 3.12, require managers of listed funds to comply with the FMC Act and its regulations requiring them to report regularly to unitholders on the fund’s performance.

NorthWest will be exempt from most of section 4 of the rules which relate to equity issues and shareholder approval of such issues including placements.

And, a relevant provision with regards to any purchase from Healthscope, NorthWest will be exempt from all of section five which relates to buying or selling assets and to related party transactions.

In particular, NorthWest will no longer need unitholder approval to have Vital buy or sell assets worth more than 50 percent of Vital’s market capitalisation or to undertake any related party transaction of the kind NorthWest is proposing with Healthscope.

NZX says fund managers such as NorthWest will still be bound by the provisions of the FMC Act relating to related-party transactions.

These provisions are laid at in sections 172 to 177 of the Act.

While they generally prohibit related-party transactions that confer a benefit on the manager, there are a number of exemptions including when the terms “would be reasonable in the circumstances if the parties were connected or related only by the transaction in question, each acting independently and each acting in its own best interests.”

Such transactions are also permitted if the terms “are less favourable to the related party.”

The supervisor – Trustees Executors in Vital’s case – can approve such transactions, if it believes they’re in the best interests of investors.

The investors can also approve related-party transactions by special resolution – requiring 75 percent of those voting to be in favour – but the Act doesn’t require such a vote.

One could regard that as a moot point since NorthWest is likely to win any special resolution so long as it can vote its 24.9 percent of Vital’s units.

NorthWest’s urge to have Vital acquire assets and to borrow will still be curbed by the gearing limits in Vital’s trust deed and under its bank covenants.

NorthWest will also be exempt from all of section 6 of the new rules which relate to investors’ voting rights and its restrictions on NorthWest’s voting rights will no longer apply, including restrictions relating to NorthWest’s position as a related party.

BusinessDesk has also sought comment from NorthWest, Trustees Executors and the Financial Markets Authority, none of whom have yet responded.


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