Technically Speaking

Friday 1st September 2000

Chart 1: Telecom

Chart 2: Lion Nathan

Chart 3: Revesco

To regulate or not to regulate. That is the question for the government, considering the sovereign function of Parliament is lawmaking. The Labour-Alliance administra-
tion is a keen regulator on the collectivist assumption that government is intrinsically good.

The government's efforts are spent on elaborating new regulations, not on questioning the need for them. There is not much philosophical debate among the socialists over the limits of state power or the desirability of multiplying laws beyond strict necessity. The bigger the state, the better in their view.

The previous government, headed in various incarnations by that political centaur the National Party, showed a more interesting tension revealed in the contrasting attitudes of ministers Max Bradford and Maurice Williamson.

Mr Williamson was a state minimalist and long resisted demands from Telecom's competitors to regulate the telecommunications industry heavily (chart 1). He maintained market forces would do the trick and has been proven right in that Telecom's grip on local telecommunications has been broken by competition enabled by technological advance and capital investment, not by bureaucratic intervention.

Mr Bradford favoured statist bureaucratic solutions, as was evinced in his failed attempt to reregulate the privatised electricity industry. He got part of the way there by forcing power line businesses to be split off from generators and retailers at huge cost in capital that must yet be recovered from electricity consumers but fell at the last hurdle when he could not muster the parliamentary support for his full-blown state-controlled-and-regulated electricity market. We will never know whether his grandiose scheme would have worked, unless it is revived in some guise by the present administration.

Regulation of the securities markets in New Zealand is likely to become a political hot potato for various reasons. The government no doubt wants to impose social justice on capitalism.

Just wait until capital raising and securities trading must take cognisance of treaty partnership. The possibility is implied in the closer economic partnership (CEP) treaty with Singapore, whose wording obliges the government to favour Maori.

Finance Minister Michael Cullen's proposed pre-funding of retirement pensions by tax provision further raises the regulatory stakes because any form of compulsory saving places a moral hazard on the government as the referee of non-voluntary transactions it has imposed on citizens. The proposed NZSE merger with the Australian Stock Exchange opens the door to uniform securities market regulations transtasman, with Australia's rigorous black letter law approach likely to prevail over New Zealand's loose caveat emptor style.

Poor recent performance by the New Zealand sharemarket may have resulted in part from lasting international consternation over what some would judge slack takeover rules and feeble regulatory defence of shareholder interests. A case in point was the widely noticed April 1998 sellout from Lion Nathan of key controlling shareholders to Kirin Breweries (chart 2). Kirin was not legally required to put in a takeover bid despite snatching 42% of Lion from a comparatively small circle of dominant shareholders.

There were ripples also over the spectacle of shareholding Lion company officers, who might perhaps have been thought to owe fiduciary duties to all shareholders, appearing to benefit preferentially as sellers at the head of the queue for Kirin's offer. Legally, there seemed to be nothing at fault with what happened by New Zealand's rules.

Disgruntled shareholders would have had to risk litigating themselves or persuade Lion to do so if they wanted recompense. There is no state authority that would step in on behalf of the public interest and no supporting regulatory armature for it to do so anyway. It is arguable whether the same transaction could have taken place in Lion's new Australian domicile.

The little guy stands small chance of redress if he thinks he has lost out on the New Zealand sharemarket. One such case involves a correspondent I shall call Mr B. He was an investor in Revesco (Chart 3) and believed he unfairly ended up $3000 out of pocket last October in favour of other parties involved in the company's rights issue. His broker suggested he complain to the NZSE, which he did, getting assistance, he claims, of limited value.

He alleges the NZSE concurred there was an apparent breach of contract and at first told him to negotiate directly with the company, which went nowhere. The NZSE also suggested he go to the "Small Claims Tribunal," which the Disputes Tribunal has not been called since 1988. The tribunal declined to hear his complaint on the grounds it involved shares, a "chosen action s11(5)(c)(iii) Disputes Tribunal Act 1988," a decision on jurisdiction that should disturb the NZSE. Back to the exchange, which recommended suing the company in court, which Mr B estimated would cost $10,000 to pursue $3000.

The NZSE had promised to take action, according to Mr B, if all else failed. He alleges it took the exchange three months of regular reminders to do anything and that finally his complaint was referred to a solicitor on the market surveillance panel. The solicitor apparently found no actionable breach of sharemarket listing rules, especially since in the six-month interim period after Mr B's alleged loss the company had relocated its domicile and home exchange to Australia.

Mr B had reached the view that the problem might not have arisen if the NZSE had inquired whether the company was possibly not conforming with s88.2 of the Companies Act in maintaining its share registry in Australia, which he claims to have pointed out several times to the exchange, but says his allegation was not acknowledged. Mr B asserts he is still out of pocket, but let us give him a last word in this Kafkaesque tale: "I refer you to the [market surveillance] panel's stated No 1 goal: 'To work with sharemarket participants in pursuit of a securities market [in which] the conduct of listed issuers attains and maintains [the] highest standards of integrity.' Fine words."

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