Changes are needed in regulation and market practice to reinvigorate New Zealand capital markets.

Our capital markets continue to be under significant pressure. The activity levels in 2019 are low, and the handful of transactions recently announced that are taking companies from the NZX into private hands, are not going to assist this trend.

The Capital Markets 2029 industry group has been tasked with identifying issues and solutions to this problem. From discussions with the group, they are conscious a real solution will require bolder steps and not just tinkering around the edges of the current framework. Changes are needed in regulation, market practice and the willingness of different types of entities to list to reinvigorate New Zealand capital markets. The number of fresh companies listing on the NZX is in decline, and the impact of its refreshed listing rules is yet to be seen.

We need this Government to be bold — as was the National Government in its early time in office when it facilitated the Mixed Ownership Model (MOM) process that brought quality listings to our exchange and gave ordinary Kiwis, who had been burnt by the 1987 crash, the opportunity to invest in solid companies that have delivered stable capital appreciation and dividend returns. Those companies have also performed better since listing than they did under full Crown ownership. In many cases the same management teams and boards existed pre and post listing. Evidence might then suggest that the disciplines of capital markets and the enhanced focus on performance have contributed to generating significant wealth for the Crown and private investors.


There remain some companies owned by the Crown that would be good additions to the NZX under a MOM type model. We believe that Transpower is one example. It would be constructive if our politicians could get past seeing partially listing as selling the family silver. In fact, the evidence out of the previous MOM process is that the polished silver got brighter!

Similarly, New Zealand has some very significant companies that are co-operatives or owned by local authority entities. It may be possible to find structures like in the MOM process that allow these entities to remain controlled by their owners but facilitate a wider and flexible (listed?) ownership of a minority stake. It could transpire to be a win-win for existing owners and our broader capital markets if this could be achieved. If capital markets participants and NZX want co-operatives and other large entities not currently listed to entertain doing so, then NZX needs to work hard to make it attractive to these entities to do so.

Unlike Australia none of our banks are listed. It is argued investors can just go and buy a stake in them on the ASX if they wish. However, if a local bank was to partially list here, it would be a welcome addition to our exchange and offer an opportunity to invest in different quality assets in an exchange that is currently very biased towards energy companies. Additionally, New Zealand is made up of many successful smaller entities that see an NZX listing as unappealing for a number of reasons, including compliance costs and liability.

With many private equity funds flush with cash to invest, selling to them is a more attractive alternative.

One can't write on the topic of our capital markets and not talk about the impact of the Overseas Investment Act on listed companies.

The recent consultation paper released by the Government in relation to the overseas investment regime proposes a number of options for dealing with foreign investment in listed companies.

The issue — at the moment — is that these entities become "overseas persons" if more than 25 per cent of their shares are held (in total) by foreign shareholders, whether they are associates or not and irrespective of the aggregation (or lack of) of those shareholdings. This means that a listed company may become an overseas person without realising that this has happened and therefore be subject to the full application of the overseas investment regime, even when their actual management and control (ie directors) lies in New Zealand hands.

Iconic NZ entities fall into this category, such as Fletcher Building, Spark and others. In our view, the right approach would be to call a listed company an overseas person if and only if (i) one of its shareholders (or a group of associates) are the holders or controllers of a stake over 20 per cent or more of the shares in the listed company and (ii) at least 25 per cent of the shares in total are held by foreign investors.


A diluted overseas participation in listed companies is very unlikely to have any meaningful impact on the direction of those entities, particularly if the majority of their board are independent New Zealanders.
Companies list on the stock exchange to be able to access capital and grow with the benefit of that, allowing a broader base of shareholders to participate in their business and to deliver benefits to them.

Listed companies that get caught in the overseas investment regime unintentionally are in a competitive disadvantaged position when seeking to buy or lease many New Zealand assets when they should not be. Our concern is that if the overseas investment regime is not reformed in a pragmatic way which encourages quality overseas investment while seeking to preserve the most sensitive of New Zealand assets to New Zealand ownership, there will be a growing perception that New Zealand is not welcoming of foreign investment.

Our country has always relied on quality offshore investment, and unfounded criticism of transactions like the recently announced acquisition of Tip Top by Froneri (for NZ$380 million) for not going through an OIO process (when a specific exemption relating to those type of investments was used) are not only unfair but unhelpful.

Froneri (the third largest icecream manufacturer in the world), lawfully relied on one of the exemptions available to allow foreign investment in significant business assets (but not including sensitive land) from Australia. We cannot see how an investment such as this could be damaging to New Zealand or its economy.

We can, though, see the reputational damage in the international scene to our country that can derive from criticism of this quality investment for political or other reasons.

Finally, in recent weeks we have seen two high profile examples of deals being leaked before the parties had concluded those deals.

This is also a trend in Australia. It is unacceptable. It can only have come from sources close to the deal. It suggests unprofessional conduct by some market participants. Leaks run the risk of harm to the entities seeking to finalize a transaction and, in some cases, harm to investors where listed companies are involved. It is time the investment community lifted its game in respecting the need to maintain confidentiality — it is a matter of market and professional integrity.

There is plenty that needs to be done to boost our capital markets. There is a role for many to play to make our markets more successful — Government, NZX, regulators, market participants and owners of businesses that operate in our market.

● Cathy Quinn and Silvana Schenone are both senior corporate partners at law firm MinterEllisonRuddWatts, and the lawyers advising Froneri on their acquisition of Tip Top ice-cream.