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Retrospective NZX rules change hurts Vital Healthcare investors

Tuesday 12th February 2019

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Changes to NZX listing rules exempting managed investment structures (MIS) from many of the rules that apply to other listed entities is an example of well-intentioned changes that may have unintended or unforeseen consequences for investors, says New Zealand Shareholders’ Association chair John Hawkins.

The new exemptions are particularly egregious when applied retrospectively to listed entities such as Vital Healthcare Property Trust, which has been listed on the NZX since 1999.

The rule changes were “sold as a simplification with no significant practical changes and, on that basis, NZSA supported the amendments,” Hawkins writes in the latest issue of NZSA’s Scrip newsletter.

The exemptions appeared to make sense because such funds are largely governed by the Financial Markets Conduct Act rules overseen by the Financial Markets Authority.

But one unintended consequence is that, “unknown to us, the listed Vital Healthcare Property Trust is regarded as an MIS and adopted the new MIS rules in January, Hawkins says.

Vital’s switch to the new NZX rules results in some fundamental changes to the minimum standards, he says.

These include:

• There are no independent director requirements

• There are no minimum number of director requirements

• The director appointment rules and process no longer apply

• The director rotation requirements no longer apply

• The right to remove a director by ordinary resolution no longer applies

• There is no requirement to have an audit committee

• Vital will not require unitholder approval for a major transaction and

• Vital will not be required to hold an annual unitholders’ meeting (AUM) unless requested by at least 5 percent of unitholders.

“NZSA is aware that Vital had waivers from NZX that covered some of these matters, but the reduced governance levels, from an investor perspective, are now entrenched in the rules,” Hawkins says.

“Quite why the Vital independent directors were silent on this change when it could have been debated at the December AUM is unknown,” he says.

“Many of the matters that so concerned investors then can no longer be challenged” because of the rule changes.

Although unitholders overwhelmingly supported five resolutions opposing actions of Vital’s manager, which is owned by Canada-based NorthWest Healthcare Properties Real Estate Investment Trust, those votes were non-binding on NorthWest.

While NZX has argued that the Financial Markets Conduct Act contains provisions that are meant to protect investors, “the requirement to act honestly and in the best interests of the unitholders sounds great in theory but is pretty meaningless in practice as it is such a subjective thing”, Hawkins says.

No longer needing unitholder approval for a major transaction is particularly pertinent for Vital’s unitholders because NorthWest has just struck a deal with another Canadian company, Brookfields Business Partners, to buy 11 freehold hospital properties from ASX-listed Healthscope for A1.258 billion.

Brookfields is in the process of taking over Healthscope.

In announcing the deal on Feb. 1, NorthWest told NZX: “Vital is not currently a party to the property transaction. Vital views it as potentially an attractive opportunity and has had significant discussions about its participation in the portfolio with NorthWest.”

However, Vital has no officers, other than the officers of NorthWest, so this effectively means NorthWest has been having discussions with itself.

NorthWest is already known to have borrowed A$81 million from Vital to further its interests in buying Healthscope properties, something unitholders clearly opposed at the annual meeting, accusing NorthWest of using Vital as if it was "a piggy bank."

Hawkins says although the Companies Act allows unitholders to remove the manager with a 75 percent vote, NorthWest owns 24 percent of Vital, making such a vote virtually impossible to succeed so a law change is needed to prevent managers of such entities from holding such a blocking stake.

Meanwhile supervisors – Trustees Executors is Vital’s supervisor – should be looking at this, he says. “Surely eliminating a unitholder right can hardly be considered as acting in the best interests of unitholders?"

Other listed entities the new rules will be applied to include Goodman Property Trust, Fonterra Shareholders Fund, the Carbon Fund and Senior Trust Retirement Village, as well as NZX’s own Smart Shares funds.

“Nowhere is there a clear warning note on their NZX listings to indicate whether normal listing rules or some lesser protocol applies,” Hawkins says.

“This has caught people out in the past with offshore registered New Zealand listed companies having very different rules.” He cites the case of Diligent which was taken over in 2016 over the protests of local investors using rules that apply in the United States but which don’t apply in New Zealand.

“In my view, it does matter when an investment looks like a cat and lives in a cattery but is actually a dog,” Hawkins says.

“The regulators and the exchange need to ensure that the unintended consequences of these changes to existing listings now being experienced by unitholders are addressed,” he says.

“To not do so would be counterproductive to an informed market and do nothing for investor confidence.”

Vital units are trading at $2.08 and have gained 1.5 percent in the last 12 months, lagging the benchmark S&P/NZX 50 Index, of which it is part. The index has gained more than 14 percent in the last year.


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