Ralec set the first earn-out target for the Clear Grain Exchange which the trading platform failed to meet under NZX's ownership, says NZX's former head of strategy Heather Kirkham.

Kirkham told the High Court yesterday that she thought the target, for 1.5 million tonnes of grain traded in its first year, was optimistic and hadn't come from NZX's due diligence team. She was being cross-examined by Georgia Berlic, counsel for Ralec, in the fourth week of the hearing between NZX and Ralec.

The stock market operator is suing Dominic Pym, Grant Thomas, and their companies is Ralec Commodities and Ralec Interactive for providing "wildly inaccurate" forecasts prior to NZX buying the Australian grain trading platform in 2009. Ralec's counterclaim says NZX and former chief Mark Weldon under-funded the business, meaning it couldn't meet earn-out targets.

NZX bought Clear for A$7 million in October 2009, with two earn-outs of A$7 million tied to performance. The initial target for the first earnout was trading of 1.5 million tonnes of grain by June 30, 2010. If that was missed, Ralec could still get the earn-out, provided Clear reached 3 million tonnes by June 2011 or 4.5 million tonnes by June 2012. The second earn-out payment was based on NZX being able to create a successful agri-portal.


Kirkham said she remembered consistently being told by Thomas and Pym that 1.5 million tonnes of grain traded through the platform was achievable.

"The original (1.5 million tonnes) came from Thomas and Pym, they thought it was a conservative estimate," Kirkham said. "My extraordinarily strong recollection is this was repeated to us on a number of occasions."

Berlic challenged Kirkham's version of events, saying she couldn't cite specific times when Thomas or Pym had referred to the target, which most likely came from NZX's own due diligence team.

Berlic put to Kirkham that during negotiations in the run-up to the purchase, Thomas had wanted the earn-out target reduced to 1 million tonnes. Kirkham replied that she had taken that as a normal negotiating tactic at the time.

Communication within the NZX due diligence team was also raised, with Berlic questioning Kirkham about an email from NZX's corporate counsel Rachael Newsome where she said the vendors were "being optimistic" about volume growth and she suspected "it would be another couple of years below 1 million tonnes."

Kirkham agreed with Newsome's views but said the three targets for that earn-out would give them further incentive if they missed the first opportunity of 1.5 million tonnes.

"We thought there was a range of things which might happen, at this point certainly we thought it might take a bit longer to get there," Kirkham said.

She accepted that NZX knew Clear had IT capability but rejected Berlic's suggestion that Clear didn't have much knowledge of the grain market.

"We knew that Clear had IT capability, we knew they'd built the grain platform, we knew Pym and Thomas didn't have grain markets as their background," Kirkham said. "We were told by them they had spent a long time getting up to speed with understanding the grain market in a short space of time - we understood they'd hired in some experts."

The trial is expected to last up to eleven weeks and has so far cost NZX between $9 and $10 million.