Aussie rules takeovers: don't bring a mate

By Shoeshine

Friday 6th August 2004

Australia's courts provide a constant diet of amusing and interesting cases. Even in New Zealand the name of convicted insider trader Rene Rivkin is pretty well-known.

Rivkin was found guilty of insider trading last year and paid a severe penalty nine months' periodic detention.

Recently his name was bandied again around the Australian courts, even though the man himself is now out of the picture.

Kiwi executives, lawyers and regulators should be monitoring the latest rash of Rivkin-related litigation because it could well affect the way takeovers and control plays are conducted here.

Australian commentators have been dining out on the ironies of the present litigation-fest.

The plaintiff in the Rivkin Financial Services (RFS) insider trading case is RFS' new controlling shareholder, Alan Davis, now the company's managing director.

In a case before the Australian Federal Court, RFS alleges three companies associated with businessman Farooq Khan breached insider trading laws when they built up a 5% stake in RFS with the purpose of dumping existing directors and appointing a new Khan-controlled board.

The allegation of insider trading comes from Australia's definition of what is insider knowledge.

Over there they define it as "information not generally known but which, if made generally available, a reasonable person would expect to have a material effect on the price of the securities [in question]."

This is the crux of the case. In New Zealand, the Securities Markets Act definition looks pretty much identical. That is: "Information which is not publicly available and would, or would be likely to, materially affect the price of the securities ... if publicly available."

The allegations on both sides in the Australian case will strike many as the purest bullshit but the Federal Court will nonetheless consider them and deliver a judgment. Both essentially deal with passing on "price-sensitive" information in this case, the intention of one company to pursue board control of another to a "cohort" who buys shares in the target in concert with the primary bidder.

The original allegation before the court was that one of the Khan-associated companies must first have formed an intention to buy shares in RFS with the intention of securing board control.

That intention, it's alleged, was in itself price-sensitive. But you can't be had up for trading on your own information.

However, to secure the co-operation of the other two Khan companies, it's alleged, the information must have been shared with them, giving the two an "insider" advantage nobody else had.

What's important on this side of the Tasman is how the Aussie court rules on that issue.

But Shoeshine would be remiss if he didn't bring to attention the delicious ironies of the counterclaim. This arises from the purchase from Rene Rivkin of RFS by Davis.

Although there are many complications the court will have to consider, the Khan camp claim basically alleges that, if it is guilty of breaching insider rules, so is RFS' new owner and by the same token. That's because Davis also used three associated companies to buy shares and also had the "price-sensitive" intention of securing board control.

Shoeshine can only imagine what the poor lawyers are having to go through. Any argument they deploy in support of their clients' claims is likely to adopted with mirror precision in the counterclaims.

In New Zealand, the Australian regime doesn't, yet, apply. In any case, neither Shoeshine nor his advisors are able to conjure up an instance of separate entities acting in concert to effect a price-sensitive outcome be that a full takeover, partial takeover or a bid for board control.

For instance, neither of this year's control bids qualifies. Craig Norgate and the McConnon boys bid for 50.1% and control of Wrightson, but they did so through a 50-50 joint venture vehicle, Rural Portfolio Investments.

Rubicon went for 50.1% control of Tenon. It did so with the full backing of its shareholder GPG but without the benefit of GPG's balance sheet.

Whatever the Aussie court rules in the Rivkin case, it's a pretty safe bet New Zealand's legislation will soon be "harmonised" with Australia's.

So if you're thinking a listed company isn't as well run as it might be and you intend to do something about it, but you're bringing somebody else on board, be sure you do so via a jointly owned company.

If the rules are so easy to circumvent it makes you wonder: what is the point of having them at all.

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