GPG's Rubicon action carries sting in tail

By Nick Stride

Friday 6th December 2002

Guinness Peat Group may have to sell down its Rubicon shareholding if it is successful in a court action against Perry Corporation.

Under the worst-case outcome for New York-based Perry of next week's High Court hearing it could forfeit its entire 16% Rubicon holding.

If that happened the shares would be cancelled, lifting the asset backing of the remaining shares.

It would also result in all Rubicon's shareholders increasing their percentage holdings of the company.

In GPG's case that would take it over the 20% Takeovers Code threshhold.

Takeovers Panel senior executive Kerry Morrell said an increase of GPG's holding over 20% would breach the code's "basic rule," rule six.

There was no class exemption for increases resulting from a forfeiture, although exemptions were allowed for in some other cases, for example, underwriting of pro rata share issues, Mr Morrell said.

Under rule six GPG would have to sell enough shares to take it back under 20%. However, in the recent judgment against PPCS in the Richmond share case, Justice Willie Young excused some Richmond shareholders from code contraventions resulting from the PPCS forfeiture. GPG will have the option of asking Justice Judith Potter for the same treatment.

GPG was initially seeking forfeiture only but is now understood to be seeking damages from Perry in addition to any benefit it shares with other equity holders from a forfeiture.

Its 75c a share offer for a 51% controlling stake in Rubicon was unsuccessful and closed this week.

The case is set down for the Auckland High Court for next Wednesday. It was initially scheduled for Monday but Justice Potter is presiding over the RSA murder trial.

It will determine for the first time whether equity swaps, which are a standard investment banking tool, are subject to the "relevant interest" disclosure rules of the Securities Amendment Act.

An equity swap is a contract between two parties to exchange two different cash flows. During the contract's life one party agrees to pay the rate of return on the shares while the other party agrees to pay a floating or fixed rate of interest.

It is essentially a means of transferring risk. The party exposed to movements in the price of the shares may mitigate its risk exposure by hedging.

GPG, led by New Zealand executive director Tony Gibbs, is essentially arguing Perry warehoused Rubicon shares it held, breaching the act's rules on disclosing substantial security holdings.

It has yet to explain what purpose it thinks Perry had in "concealing" Rubicon share ownership.

It says it would not have bought its 19.9% Rubicon stake if it had known there was "another major shareholder" on Rubicon's register.

According to GPG Perry first disclosed a 10.2% holding, then filed a notice that it had only 4.9%.

In the meantime it had entered into swap agreements with investment banks UBS Warburg and Deutsche Australia under which the banks acquired millions of shares from Perry.

GPG alleges these shares in substance belonged to Perry.

Perry has argued it owned the shares in the economic sense because of the swaps, but not in the legal sense because the voting rights were held by UBS and Deutsche and it was unable to influence which way they were voted.

Nor were the bankers obliged to return them to Perry on demand.

It said it regained legal title to the shares when it needed to vote them at the Rubicon annual meeting.

The Perry case has been compared with the recent trial in which meat processor PPCS was ordered to forfeit 6.8 million shares it held in Richmond.

But the two cases are substantially different.

In the Richmond case Justice Young ruled PPCS had breached the act by failing to declare a relevant interest in shares held by a company which turned out to be a PPCS nominee.

The Perry arrangement transferred shares to the investment banks. Although the arrangement wasn't disclosed through the Stock Exchange it is understood several broking firms other than UBS and Deutsche knew about it.

If the court agrees with GPG's interpretation it will have a variety of options.

At the least it can order Perry to sell the shares, or not to sell them.

If the shares, worth around $30 million at market prices, are ruled forfeit Rubicon must cancel them and transfer from its paid-up capital account to a "forfeited shares reserve" a sum equal to the subscribed capital those shares represent. It could then pay out to its other shareholders in the form of bonus shares.

It remains to be seen whether Perry Corporation boss Richard Perry will comply with a court order to give evidence in person.

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