Brian Gaynor: PPCS secret squirrelling could be costly

Justice William Young has handed down a landmark judgment in the Richmond/PPCS case which indicates that breaches of the substantial security shareholders notice regime will be treated seriously and could result in punitive damages.

The judgment has serious implications for Richmond and PPCS, and GPG will be hoping that the decision is a guideline to its action against Perry Corporation, which begins on December 9.

The Richmond/PPCS story began in 1990 when the Meat Board took a 33.4 per cent stake in Richmond.

PPCS, the Dunedin-based meat co-operative, had its eye on Richmond for a number of years but did not make its first purchase until the mid-1990s.

It acquired a 1.4 per cent holding in 1996 and 1997 in the name of two individuals. (These are called the Nelson shares because one of the individuals was Mr R.B. Nelson.)

In October 1997, the Meat Board put its 33.4 per cent stake up for sale. PPCS made two separate offers, one on its own account and another in the name of HKM.

The company made a disguised offer because it feared that Richmond would veto its purchase of the Meat Board stake.

HKM was introduced to Richmond as a company representing Maori interests and independent of any meat industry participants.

To conceal the connection between PPCS and HKM the offer was called "Project Josh" after Josh Kronfeld, the Otago and All Black loose forward. PPCS was the "Flanker", HKM the "Halfback" and Richmond the "Fullback".

PPCS was the highest bidder at $1.86 a share but Richmond obtained an interim court injunction against the purchase. The effect of this was to prevent, pending trial, the sale of the Meat Board's shareholding to any party that was not approved by Richmond.

Two weeks after the interim injunction was granted, the Meat Board agreed to sell its parcel to HKM at $1.88 a share.

At the 1998 annual meeting, the three HKM directors were re-elected together with two others who represented or supported PPCS. Justice Young concluded that PPCS effectively held five of the nine board seats yet it had not disclosed any shareholding.

In February 1999, PPCS said it had acquired a one-third shareholding in HKM and had an option to acquire another third.

The substantial security holder notice did not disclose the Nelson shares.

PPCS' incomplete disclosure created a great deal of unease at Richmond. The company made two share placements - 2 per cent of issued capital to staff and 8 per cent to Peter Spencer - and made a cash and scrip offer for Waitotara Meat. The new shares diluted HKM's holding to 25.5 per cent.

Later that year PPCS started buying more Richmond shares through HKM. Spencer sided with PPCS and in January 2000 Sam Robinson was rolled as Richmond's chairman.

The removal of Robinson - who has since been reappointed chairman - stirred up strong resistance among Richmond shareholders. They formed a company called Richhold to aggregate their individual holdings into one entity.

They also challenged the legality of PPCS' acquisition of the one-third stake in HKM.

Richmond formed a committee of independent directors to investigate the PPCS/HKM transaction.

The committee declared on June 28, 2000 that PPCS was a defaulter because of breaches of the notice and pause provisions of Richmond's constitution.

The company was given one month to sell its shareholding held through HKM. This had risen to 35.8 per cent.

PPCS put its stake on the block and there were two main contenders: Talleys Fisheries, which now has a major stake in Affco, and Active Equities, controlled by former Brierley Investments trio Paul Collins, Bruce Hancox and Patsy Reddy.

Just before the month expired, PPCS sold its 14.7 million Richmond shares to Active Equities at $2 a share, realising a profit of more than $4 million.

PPCS provided Active Equities with vendor finance of $12.5 million in the form of redeemable preference shares. Active Equities said this allowed it "to obtain non-recourse bank debt for the balance of the investment, thus limiting Active Equities' financial exposure".

The battle for control of Richmond reignited in May last year when PPCS bought 16.7 per cent at $3. This included Spencer's shareholding, leaving him with a profit of more than $7 million.

A month later, PPCS reached an agreement to buy 49 per cent of Active Meats, the company that held Active Equities' Richmond holding, at an effective price of $3.65 a Richmond share.

In May, Active Equities exercised an option requiring PPCS to buy the remaining 51 per cent, at $3.50 a share, by February 1.

The total transaction will cost PPCS more than $50 million, leaving Active Equities with a profit of more than $23 million on its short-term Richmond holding.

The court proceedings originally focused on the PPCS/Active Equities deal. As proceedings developed the allegations against Active Equities, that it had warehoused shares for PPCS between July 2000 and June 2001, were abandoned and the focus turned to the original HKM transaction.

In his judgment handed down on August 30, Justice Young decided by a comfortable margin that HKM was a nominee for PPCS and had breached Richmond's constitution and the substantial security disclosure requirements of the Securities Amendment Act 1988.

He found that the non-disclosure of the Nelson shareholding also breached the act.

Justice Young decided in favour of Active Equities and Peter Spencer on the basis that PPCS had no interest in the Richmond shares held by them.

In his remedies decision, handed down on November 22, Justice Young made a number of significant declarations. Robert Dobson, QC, on behalf of a plaintiff, argued that breaches of the substantial security holders notice regime were serious but Alan Galbraith, QC, PPCS' counsel, maintained that penalties under the act were mainly intended to be a deterrent, and not meant to be punitive.

Justice Young agreed with Dobson. He gave PPCS two options if it did not announce an intention to appeal by 4pm Monday:

* It must make a full takeover offer for Richmond and obtain at least 90 per cent.

* PPCS must forfeit the 16.8 per cent currently held and lose its voting rights on the 35.8 per cent held by Active Meats.

Justice Young believes the loss of voting rights will encourage PPCS to make a full offer.

The judgment represents a huge loss to PPCS and managing director Stewart Barnett, in reputation and financial terms.

PPCS has lost nearly $20 million on the Active Equity stake and will lose an estimated $9 million on the forfeiture of the 16.8 per cent shareholding.

It has also incurred substantial legal costs, both for itself and the plaintiffs.

Richmond's share price has risen from $1.81 to $2.30 in anticipation of a full bid. But the situation is far from clear-cut, as PPCS said last night that it would appeal the decision.

This could take until the second quarter of next year and Justice Young's decision might be overturned or the remedies adjusted.

The Richmond/PPCS judgment gives GPG encouragement.

If the court decides that Perry Corporation failed to declare its full Rubicon stake, and requires a portion of it to be forfeited, then GPG's Rubicon shareholder can go above 19.99 per cent without being subject to the provisions of the Takeovers Code.

PPCS: A TIGHT TIMETABLE


December 2: PPCS must decide whether to appeal against Justice Young's decision.

December 20: Richmond annual meeting, all parties can vote.

December 31: Deadline for full takeover offer by PPCS for Richmond. PPCS must obtain at least 90 per cent.

February 28: If PPCS does not reach 90 per cent, it must forfeit a 16.8 per cent shareholding and lose the voting rights on the remaining 35.8 per cent held on its behalf by Active Meats.


* Disclosure of interest: none.

* bgaynor@xtra.co.nz