Exchange directors dither as the Montana muddle mounts

Friday 15th June 2001

The board of directors of the New Zealand Stock Exchange must get out from under its rock and tell the market what the rules governing takeovers are.

The exchange-appointed standing committee that ruled on Lion Nathan's takeover of Montana has torn up the book, overturning the interpretation of the listing rules given by previous committees and by the exchange's own managing director, Bill Foster.

It is an unhappy coincidence that the Montana committee's back-flip came less than four weeks before the Takeovers Code comes into effect on July 1.

Hundreds of millions of dollars worth of transactions have been undertaken in anticipation of this "known" quantity. These have involved some of New Zealand's largest listed companies and some of our largest overseas investors.

As a result of the Montana committee's ruling many, if not all of those deals, are now vulnerable to challenge. No lawyer in the country can safely advise the companies involved of their legal standing.

Equally perilous is the position of Montana's independent directors who must now decide what penalty should be imposed on Lion for the "breach" of the exchange's listing rules the committee has ruled occurred. In the legal No-Man's-Land the ruling has created they face personal liability if it can be shown their decision didn't lead to the best possible outcome for their shareholders.

This lamentable state of affairs has come about because the listing rules for which the exchange's board is responsible fall well short of providing certainty for companies and for their advisers.

The Montana committee had in essence to decide whether telephone conversations before midnight on February 8 between equities dealers from Lion's sharebroker, Credit Suisse First Boston, and institutional shareholders of Montana constituted "transfers" to Lion of the shares the institutions held. No one has disputed that if they did, they breached the listing rules.

The committee's decision was based on what it perceived to be the intentions of the rules' writers. The rules catch a "proposal" to dispose of shares.

At issue is the question of when a deal is a deal. It is fundamental to businesspeople everywhere that they must stand by the deals they strike. But is it a deal if one or both parties can walk away?

The committee ruled a "proposal" need not be a binding contract from which neither the "buyer" nor the "seller" may back out.

Stock Exchange managing director Bill Foster seems to think otherwise.

In an article in the New Zealand Herald of February 24 he was quoted as saying:

"There is nothing under the rules that says you can't talk to people about whether they might be interested in selling their stock to you. But you cannot complete a binding contract before the notice period expires."

"That is, people must be free to back away before the notice period expires."

Previous rulings by standing committees appointed by the exchange have, to the extent that they gave an opinion on the definition of a "transfer," all agreed with Mr Foster.

A committee ruled, for example, on August 31, 1999, on an offer by Goodman Fielder to buy Ernest Adams shares held by Gourmet Direct International. It said:

"The rule definition of "transfer" requires that a party be bound, in substance, effect, or form, before arrangements should be characterised as a transfer.

"GF was not bound to proceed with its offer, and GDI was not bound even conditionally to accept any offer in respect of the balance of its shares if GF did proceed."

These decisions by previous standing committees provide the precedents on which companies and their advisers have had to rely. Lion Nathan and CSFB relied on them on February 8. The Montana committee gave them short shrift.

It noted it need not rule the same way as previous committees. It noted one committee (all previous committees, in fact) "had a majority of non-lawyer members.

"To the extent that they (previous rulings) are contrary to the views reached by this committee, we must disregard them," it noted, in a fine high-handed style.

The committee was entitled to rule as it chose. Its decision has the potential to create market chaos.

A restricted transfer notice (RTN) given on May 7 by Independent Newspapers Ltd, for example, spelled out its intentions to lift its stake in Sky Network Television.

"At the expiry of the RTN relating to Todd Capital INL envisages entering into commitments with Todd ... to acquire Todd Capital's entire Sky shareholding (being 42,536,862 Sky shares representing 11% of Sky's issued securities.)"

At the current INL share price this "proposal" was worth $150 million. Both INL and Todd could have backed out before the shares actually changed hands.

Did their directors and executives discuss it beforehand? If they did, according to the Montana committee's ruling, it was already a done deal. All that is needed is someone - one legally-minded small shareholder, or perhaps a corporate greenmailer - to take exception and the whole deal might still be unwound.

Or take Edison Mission Energy's recent move to 50.1% of Contact Energy. Or Craig Heatley's takeover of eVentures.

All of these "proposed" transactions, and many more, were "proposed" by businesspeople and their advisers relying on the interpretations of the Stock Exchange's listing rules published by previous exchange standing committees.

To date the exchange's response has been this:

"The board of the NZSE will be considering the implications of the committee's decision on the interpretation of the rules and will decide whether further rule changes to clarify intentions should be made."

"However, in that respect it is recognised that the government's Takeovers Code comes into force on 1 July and the existing section 4 of the listing rules then will have only limited application to issuers who are not code companies."

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