The Shoeshine Column: Time to waive exchange's right to rule

Friday 23rd February 2001

A while ago Shoeshine asked a former Fletcher Challenge heavyweight what he thought lay behind the company's decline.

"Shoeshine," says he, "never have I seen so many smart people get together and make such dumb decisions."

His verdict sprang instantly to mind when the Stock Exchange's market surveillance panel, under heavy media pressure, came up with its weird explanation for granting the infamous Lion Nathan/Montana waiver.

The results are history and so, Shoeshine suspects, will shortly be the market policing function with which the Stock Exchange has been entrusted.

Shoeshine doesn't want to bang on about the Lion waiver - others have done so ad nauseam - but one aspect of the panel's message is so goofy it bears repeating.

The panel said: "There was nothing in the terms of the request, or in the surrounding circumstances, that suggested to the panel that any waiver would be used to pursue off-market transactions before the market opened on 09/02/01."

Attached was the waiver application from Lion, noting that its notice of restricted transfer allows purchases on the market, by private treaty, or by an offer under the Companies Amendment Act 1963.

How can the panel members claim they could not have foreseen Lion would stitch up the big holders overnight? After all, it's less than three years since Kirin bought into Lion itself by doing exactly that.

The "explanation" becomes even more incomprehensible when you look at the calibre of the panel members concerned. Paul Bevin is the managing director of the country's second-largest funds management group. Denis Wood, a fellow of the Society of Investment Analysts, is a director of Ernst & Young corporate finance. Sir Ian McKay, a retired Court of Appeal judge, has been a commercial litigator and a director of Independent Newspapers Ltd.

Nor do the panel's other members exactly look like chooks - you can look them up at www.nzse.co.nz.

But the 11-member Stock Exchange board-appointed panel shows the same preponderance of lawyers (five) and accountants (three) much complained about on the boards of listed companies. And only three have listed company board experience.

To be fair it's not easy in a country this size to find appropriately qualified people willing to do the work - for a modest $5000 a year and $200 an hour spent considering the panel's business.

But the members share responsibility for ensuring companies don't abuse the rights of the shareholders the listing rules are there to protect. The Montana fiasco raises two fundamental questions about the role they perform.

First, what's the point in having rules at all if they are waived so often, and, in Lion's case, so incomprehensibly?

The panel's annual report shows that in the 12 months to last June companies applied for 81 waivers and were granted 64 (79%). The year before 98 were applied for and 79 (81%) were granted.

The panel's chairman, Bell Gully chairman Keith Familton, says the figures look high but don't tell the whole story.

Many waivers are granted, he says, in technical situations where something doesn't quite fit with the rules and there is nothing of significance for shareholders.

That may be true but shareholders can't be sure.

Last year 33 of the 40 applications for a waiver from the rule covering an issuer's transactions with directors or associated persons were granted.

Of the 41 other waiver applications 17 sought to exempt companies from having to get shareholder approval for a major transaction involving more than 50% of shareholders' funds. The annual report doesn't say how many were granted.

Nor does the panel explain, except under heavy pressure, why a waiver was granted. The prospectus for Fletcher Challenge's Rubicon spin-off reveals it has a waiver allowing it, before the end of this year, to sell all its Forests division shares without asking shareholders. Why does Fletcher need a waiver? Not disclosed.

Then there's the other major question about the panel's effectiveness. Why aren't shareholders being told about all these waivers?

Chairman Familton: "More often than not we will require it to be disclosed. There are some cases where confidentiality of the waiver is critical to the company, for example in a commercial situation where the company is looking to buy an asset."

Shoeshine: "But that can be dealt with by requiring the waiver is disclosed after the need for confidentiality has passed."

Familton: "Indeed. And on occasions we've required that."

Shoeshine: "So would you agree in principle that shareholders should have the right to know if the company they've invested in has been given a waiver from the listing rules?"

Familton: "I wouldn't go as far as saying a right to know as a blanket proposition. But I would certainly agree that in cases it's desirable to do so, so they're aware of the fact of a waiver and what it's all about."

Shoeshine: "So shareholders simply have to rely on panel members to ensure non-disclosure of a waiver isn't against their interests?"

Familton: "Yes."

In the wake of the Montana affair such trust is going to be hard to find among the investment and financial communities. A little disclosure could go a long way.

At the very least the panel could disclose the fact a waiver has been granted. And it could provide on request, confidentiality excepted, an explanation to a shareholder, or better still, in public.

In any case another "fiasco" in New Zealand's "Wild West" will have concentrated ministers' minds on investor protection. It's doubtful they'll think a few patches will fix the system.

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