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COMMENT: Retail shareholder perspective missing in action in capital markets review

Wednesday 11th September 2019

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One glaring omission in the capital markets review committee's report this week is the point of view of retail shareholders which is largely missing in action.

Perhaps that was inevitable, given the committee’s make-up: chair Martin Stearne was formerly managing director of merchant bank FNZC, now Jarden, and Jarden chief executive James Lee is also one of the 10-person committee.

To be sure, Jarden has a large retail client base, as does Forsyth Barr whose chief executive, Neil Paviour-Smith was also on the committee, but that's not the same as representing retail shareholders.

The others include bankers, brokers, fund managers, lawyers and professional directors.

When their names were announced in March, the New Zealand Shareholders' Association expressed surprise and disappointment that none of the appointees directly represented retail shareholders.

Stearne says the committee did its best to ensure all those with a stake in the outcome were included in its consultations, including NZSA.

"We had some pretty active dialogue with them," he told BusinessDesk.

An appendix to the report lists NZSA under the list of those due "special thanks" as well as seven NZSA members among the long list of market participants consulted.

It isn't that the report ignored retail investors – but it came up with some wrong-headed recommendations.

For example, it correctly noted that many retail investors still don't read offer documents, instead relying on their advisers' recommendations.

That's even though offer documents have already been simplified, and some of the information they used to contain has been transferred to the Disclose Register operated online by the Ministry of Business, Innovation and Employment.

"Feedback indicates that they (offer documents) are still unnecessarily long and complex for retail audiences."

So, the review committee is recommending yet further "simplification" of offer documents, including removing the requirement to provide financial forecasts.

But it's obvious there will always be retail investors who prefer to rely on their advisers and providing those advisers with even less information to inform their advice is nonsensical, although it might save offerors some money.

And a number of concerns high on the list of outgoing NZSA chair John Hawkins in his valedictory speech to last months' annual conference were not addressed in the report.

For example, the issue of listed companies opting for schemes of arrangement rather than takeover offers governed by the Takeovers Code.

While a takeover requires the acquirer to reach acceptances for at least 90 percent of the shares before it can compulsorily acquire the remainder, a scheme of arrangement requires only 75 percent of the shares voted in favour at a meeting, so long as at least 50 percent of the shares are voted.

"It wasn't something that the committee gave great consideration to," Stearne said. "It didn't surface as enough of an issue to be considered by the committee."

The most recent takeover offer to be announced, that of New Zealand Oil & Gas, is via a scheme of arrangement, as were the recent Trade Me, Westland Milk and Methven takeovers.

At the NZSA conference, Hawkins said: “It’s my personal view that they reduce the ability to withstand a takeover. What is wrong with our executives and directors who, when things get a bit tough, would rather support an easy exit via a scheme of arrangement?”

Hawkins railed against brokers who try to present boards with unsolicited proposals for schemes of arrangement that are often stitched up with the agreement of large institutional shareholders before retail shareholders know anything about them.

“Have the regulators ever looked at disclosure around that? I don’t have the answer, but it’s an interesting question,” Hawkins said.

Another issue clearly of concern to both retail and institutional shareholders was the farce that played out with CBL shares continuing to trade despite the prudential regulator, the Reserve Bank, believing it to be insolvent for at least months, if not years.

RBNZ's order of secrecy took precedence over the continuous disclosure mandated by the Financial Markets Conduct Act.

"Whilst CBL remains an active case with the various regulators, this report was just not going to make any comment on it," Stearne said.

However, NZX chief executive Mark Peterson has indicated he recognises the problem, although he won't discuss it while the case remains active. "It's a live question still," Peterson assured BusinessDesk.

Another matter the report didn't address was NZSA's policy of wanting listed companies to choose to raise capital via rights issues to ensure all shareholders are treated equally, rather than via placements to institutions and professional investors.

Stearne says that issue has already been dealt with in NZX's new governance recommendations that took effect from January.

The relevant recommendation reads: "If seeking additional equity capital, issuers of quoted equity securities should offer further equity securities to existing security holders of the same class on a pro rata basis, and on no less favourable terms, before further equity securities are offered to other investors."

While listed companies aren't bound by such recommendations, the NZSA has never sought to have companies banned from using placements, acknowledging their efficacy when time is of the essence, such as with a major acquisition.


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