Brian Gaynor: NZX rules there to protect small shareholders

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Companies frustrated by regulations on delisting.

Just Water International and Coats have revived the controversy regarding the delisting of NZX companies, which was covered in the October 24 column.

Just Water's annual report, which was released in October, revealed that the company "intended to apply to the NZAX (the NZX's old market for small and mid-sized companies) to delist the company, and a resolution will be tabled at the annual general meeting proposing to do so".

There was no delisting motion in the notice of meeting.

At this week's annual meeting Tony Falkenstein, Just Water's chairman and chief executive, berated the NZX.

He said: "I do have to say that the NZX who are required to review the resolutions, charge excessively for the privilege. In this case, for the review of 5 resolutions they invoiced us for 9.5 hours at $650 per hour; they have agreed to reduce the rate, but not the hours."

"Although in itself not a bill that will send the company broke, it is a continuation of the monopolistic and bullying tactics they use to extract fees from members.

"It is no wonder that this is one of the worst performing stock exchanges in the world. We will be referring the NZX to the Commerce Commission for continuing its practice of abuse of its monopoly position as well as price gouging".

Falkenstein talked about five resolutions but there were only four on the agenda. It is fairly obvious that the missing resolution was the proposed delisting and the NZX, quite rightfully, played hardball on the issue.

NZX Listing Rule 5.4.1 states that: "An issuer may request ... by not less than one month's prior written notice to NZX, that it cease to be listed or that some or all of its securities cease to be quoted."

The NZX may impose the condition that shareholders are required to approve the transaction with only those holding 10 per cent or less of the company eligible to vote.

It is clear from these Listing Rules that The Harvard Group, which owns 79 per cent of Just Water, would not be able to vote on a delisting resolution.

Harvard, which is controlled by Falkenstein, made a takeover offer for Just Water last year at 15c a share compared with the 2004 IPO price of 50c a share. The takeover was unsuccessful as Harvard only raised its stake from 70.8 per cent to 79 per cent under the offer.

Falkenstein, in my opinion, appears miffed by his failure to gain full control and the NZX's determination to enforce its rules and protect minority shareholders.

At the end of his address Falkenstein said that the process to delist "was more complex than we thought" so it was decided that Just Water would remain listed. But he had a spiteful parting shot at the NZX when he said that the NXT, the NZX's new market for small and mid-sized companies, "seems to be a platform devised by two economists and a lawyer, with no commercial rationale. In my opinion it is doomed to failure. I would wager with Tim Bennett (NZX's chief executive), that NXT will never ever achieve 15 members, and his successor will close it down. If I am wrong, I will send him a bottle of French champagne".

Just Water will remain listed until Falkenstein, or some other party, makes a takeover offer and reaches 90 per cent. This is the figure at which a successful bidder can enforce compulsory acquisition and delisting.

Richina Pacific and GuocoLeisure (formerly known as Brierley Investments) were two high-profile delistings and Coats Group (formerly Guinness Peat Group) is expected to delist on June 24 next year.

The Richina Pacific delisting was ingenious because it involved a merger between the NZX company and one in Bermuda and two in the British Virgin Islands to form a new company. This new company was not listed on the NZX nor did it intend listing on the NZX.

The merger proposal required a 75 per cent majority but the major shareholder, who owned 45.9 per cent, was eligible to vote. The combined merger/delisting proposal should not have been sanctioned by the NZX as minority shareholders have been severely disadvantaged by Richina Pacific's delisting.

In December 2013 GuocoLeisure announced that it would delist from the NZX on June 24, 2014 but remain listed on the Singapore Stock Exchange (SGX). The company, which once had 178,000 New Zealand shareholders, argued that New Zealanders now owned only 4.1 per cent of the company and the average daily volume on the NZX was only 22,567 shares compared with 2.3 million shares on the SGX.

The NZX did not require shareholder approval even though the controlling Singapore shareholder owned 66.5 per cent of the company and would not have been able to vote.

There was little opposition to the delisting as New Zealand investors had lost interest in Sir Ron Brierley's former company.

GuocoLeisure gave shareholders three options: do nothing and the shares would be transferred to a Singapore register; put the shares in a nominee account of a New Zealand or Singapore broker; or sell shares on the NZX before delisting.

Shareholders should have sold on the NZX because Guocoleisure's SGX share price has fallen 24 per cent since delisting while the New Zealand market has appreciated by 10 per cent over the same period.

On November 17, Coats Group announced that it intended to delist from the NZX and ASX on June 24 but would remain on the main market of the London Stock Exchange.

The decision reflects "the much reduced shareholder base in the two countries" even though 375.3 million shares have been traded on the NZX this year compared with 359.4 million in London and 101 million on the ASX.

The other reasons given were the benefits of concentrating trading volumes on one market, the prospects of being included in the FTSE All Share Index, the transition from an investment company to a global manufacturer and a reduction in costs associated with a triple listing and share register structure.

Coats will seek shareholder approval to delist from the NZX by way of an ordinary resolution (requiring approval of 50 per cent of the votes cast) at the May 18 annual meeting next year. It appears that all shareholders will be able to vote on the delisting proposal.

Coats shareholders have the following five options:

• Sell their shares on the NZX

• Participate in a share sale facility whereby its shares will be sold on the London Stock Exchange cost free with the proceeds distributed in New Zealand dollars

• Open a nominee account with a broker in New Zealand or the UK with the broker nominee holding legal title to the shares but with shareholders retaining beneficial ownership. Fees may be charged on this arrangement

• Transfer the shares to the main UK registry although the shares could not be traded electronically unless the shareholder has an individual account with CREST

• Do nothing and let the shares automatically transfer to the main UK registry

GPG, like GuocoLeisure (Brierley Investments), was once the darling of the NZX but those days are long gone.

Given the share price performance of GuocoLeisure since its NZX delisting, and the cost and complexity of holding shares on a UK registry, small New Zealand shareholders may be best advised to sell their Coats shares.

However, this may not be the best course for shareholders who have a strong conviction that the company's manufacturing operations will achieve better than average returns.

• Brian Gaynor is an executive director of Milford Asset Management which holds shares in Just Water International on behalf of clients. He personally holds a small number of GuocoLeisure and GPG shares for nostalgic reasons only.