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In need of a blast of financial wind

By Shoeshine

Friday 28th February 2003

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The Stock Exchange's market surveillance panel has long copped flak from media and market commentators, including Shoeshine.

Some of it has been pretty fair and some less so. On occasion the panel has taken the barbs to heart and mended its ways.

What hasn't been much recognised, either by critics or by the exchange itself, are the feeble resources the panel has at its disposal to do a complicated, adversarial and mostly thankless job.

Twelve members, none of whom can come from listed issuers or sharebroking firms, labour in "divisions" of three members each. They are invariably well-known people with a strong knowledge of securities markets law and regulations. In other words, the sort of people who scarcely need the miserly $5000 a year retainer and $200-an-hour pay panel membership offers. They have an executive staff of four compared, for example, with the Commerce Commission's 110.

That probably explains the often extraordinary length of time the panel takes to reach its decisions.

The division considering allegations of a breach of listing rules by Trans Tasman Properties this week finally came to a decision ­ no breach.

The panel became interested after TTP's annual meeting in May last year, when Guinness Peat Group gave TTP's directors a grilling about related party transactions and shareholder Garth Christensen made a complaint.

The facts of the case don't take long to tell.

TTP is 55% owned by Hong Kong businessman Jesse Lu's SEA Holdings. SEA also owned, at the time in question, a 24.9% stake in Professional Service Brokers, an Auckland-based "supply chain management and e-procurement" provider.

Lu was a director of both TTP and PSB. TTP director Don Fletcher was also on the PSB board.

PSB needed some capital and, in December 2000, TTP took a PSB share placement giving it 12.5%.

The size of the transaction was, coincidentally no doubt, just below the 5% of average market capitalisation that would have triggered the need for TTP shareholder approval as a material transaction.

Four months later it bought a further 4.7% from SEA, taking its stake to 17.2%, for which it had shelled out $7.3 million.

The panel's language is interesting. It said it reached its ruling "on the basis of the facts put forward by TTP" and "based on the information provided to the panel."

Its decision seems pretty clear-cut. TTP's directors told it the company had no right or obligation, at the time of the first purchase, to buy the 4.7% stake. An option to buy "arose" in mid-February 2001.

Listing rule 9.2.2, as it stood at that time, said nothing about "related series of transactions." It just required shareholder approval for "material" transactions. As neither the 12.5% stake nor the 4.7% stake were "material" there was no breach.

What's surprising is that it took 10 months for the panel to come to this conclusion in a case where the facts were well-documented and the arguments well-rehearsed.

So long in fact has it taken that the relevant listing rule has changed. It now refers both to "material transactions" and to "related series of transactions."

The panel wasn't required to say, and didn't, whether the PSB purchases would have fallen foul of the amended rule. But the subtext of its ruling suggests that they would.

Take another example, Vertex Group's share float in July last year.

The float prospectus was hammered heavily at the time for the dubious nature of its forecasts and the group duly announced on September 4 it wouldn't meet them.

Both the Securities Commission and the panel announced on September 11 they were investigating. Both inquiries are still under way five months later.

In fact they've taken so long they've been overtaken by events as Vertex last week again downgraded its forecast.

These aren't the only snail-paced rulings.

An investigation into a purchase of bonds by Utilico, begun in February last year, took eight months to complete.

Another investigation took six months to exonerate Tranz Rail of breaching the listing rule relating to releasing relevant information.

An investigation into the famous comments made by Prime Minister Helen Clark about Air New Zealand shares took four months, which admittedly beat the pants off the Securities Commission's parallel seven-month marathon.

It took the panel three months just to decide Rubicon should have disclosed its "phantom" executive options, and a relatively speedy two months to find Vending Technologies guilty of failing to get shareholder approval for a material related-party transaction.

These long delays shouldn't be taken by anybody as evidence the panel's members go about their duties in a half-hearted or sluggish way. After all, most of them have high-powered day jobs and the danger of expensive and long-winded legal action if the issuers they call to account get litigious means they have to produce cast-iron rulings.

But with the advent of the exchange's new continuous disclosure regime the workload has become heavier still.

It's time the exchange, like the "director's club," looked outside its traditional narrow gene pool. And to attract competent people to the job it will have to offer pay that actually compensates them for the time they'll have to put in.

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