Friday 7th March 2003
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The exchange's market surveillance panel this week found Vertex had breached listing rule 10.1.1 by failing to tell the market soon enough that it wouldn't meet the profit forecasts in last year's prospectus.
Vertex said it disagreed with the panel about the point at which there was sufficient certainty about the profit information to warrant disclosure.
It added "the Stock Exchange also disagrees with the panel, but for different reasons."
In fact the point on which the exchange disagreed with the panel was on the severity of the "punishment." The panel simply noted the breach; the exchange thinks it should have issued a "censure." It had no problem with the panel's finding Vertex should have released sooner.
An emailed response to Shoeshine's enquiries shows Vertex's PR advisers, Porter Novelli, knew perfectly well what the exchange was saying. Alleging in a public statement that the exchange agreed with Vertex and disagreed with the panel on when the information should have been released is a blatant and serious misrepresentation of the exchange's position.
You'd imagine the exchange is pretty annoyed about this. But as it tied its own hands by insisting it would make no further statement we'll never know.
Vertex's response, initially headed "NZSE should move to remove confusion," also appears to want to blame the breach on the exchange's new continuous disclosure regime, which applied to listed issuers from December.
The panel concluded, after six months of investigating, that Vertex's directors and management knew when the company listed on July 1 that profits at two divisions were falling short of the levels touted in the prospectus. It doesn't help that those two divisions Technical Injection and Securefresh were highlighted as the "blue sky" units that would drive profits forward.
The panel reckoned senior management in particular "could have and should have moved more quickly to determine whether a change requiring disclosure had occurred and placed it before the board."
The line appearing in a second, amended Vertex response statement was effectively: if we couldn't manage to comply with the old rules, what chance has anyone of complying with the new, more onerous ones?
It may be, as Vertex claims, that the new regime is causing "confusion." What new regime doesn't? But that's irrelevant. No doubt the panel, if it survives, will give issuers some leeway to adjust to the new regime. The rule Vertex breached had been in force for many years.
Vertex's hapless shareholders should ask why their board is wasting money on PR designed to deflect attention from their own lax governance, and poor PR at that.
All eyes will now be on the outcome of the Securities Commission's investigation which, although covering much of the same ground, is concerned with the more serious matter of whether Vertex's prospectus was misleading.
The panel's ruling stops just short of pre-empting the commission. Its finding was that the board knew at the time of listing (July 1) that the two divisions were performing below expectation.
The commission will be asking whether the directors had the same information when they signed off the prospectus on June 7.
The distinction is important to shareholders who subscribed to the issue.
Under s37A of the Securities Act, subscribers can demand their money back if the prospectus was known by any director, at the time of the shares' allotment, to be "false or misleading in any material particular."
They can exercise this right within one year of being issued with their shares in Vertex' case on or just before July 1 this year or within six months after they "know, or ought reasonably to know," that the section has been breached.
The panel has found only that a listing rule, 10.1.1, was breached. A ruling by the commission that the act was breached too will presumably set the six-month clock ticking.
It will also raise the question of criminal liability for the directors. Issuing a prospectus containing misleading information carries a maximum $15,000 penalty but it's up to the Companies Office, not shareholders, to bring a prosecution.
Contrary to popular belief, shareholders wouldn't end up bearing the cost of any fines as the act precludes companies indemnifying directors against criminal liability.
A civil suit is available to shareholders under s56 but this has to pass the far higher hurdle of proving an "untrue" statement.
A third legal avenue would be to pursue the auditor, PricewaterhouseCoopers.
Any case would have to establish both that the auditor knew a statement was misleading, and that it was liable under common law.
Suing auditors is a popular pastime in the US but the same deep pockets that make them an attractive target also allow them to put up a heck of a legal fight.
PWC's prospectus audit certificate contains the standard disclaimer that "actual results are likely to be different from prospective financial information" and that PWC expresses no opinion on whether the forecasts will be achieved. The effectiveness of such disclaimers has yet to be tested in court.
Shoeshine would imagine a government that has made much of its desire to clean up our "wild west" securities markets will be encouraging the commission to string up the first high-profile miscreant it can find.
The commission, with new, beefed-up powers and a bigger budget, is probably also keen to get some runs on the board.
But blood sport lovers shouldn't get too excited. Proving who knew what and when at Vertex will be, as ever, a very tricky task.
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