Due diligence, always a controversial issue, is in the spotlight again because of bids, or expected bids, for Carter Holt Harvey, Metlifecare, Oyster Bay Marlborough Vineyards and Restaurant Brands.
Why has Bill Falconer, who is chairman of Oyster Bay and Restaurant Brands, allowed an overseas private equity group to do
due diligence on the latter but refused a similar request from Peter Yealands in relation to the wine grower?
Why hasn't Falconer released the Restaurant Brands independent appraisal report, an analysis that would enable all shareholders to be more fully informed about the value of the company?
Why have Metlifecare directors become so incredibly secretive since Cliff Cook announced his 25 per cent stake was for sale?
These questions suggest there are major flaws and inconsistencies regarding our due diligence and disclosure rules.
Due diligence, which is a detailed examination of the financial and other aspects of a company prior to making an investment, is covered under the disclosure and information section of the NZX Listing Rules.
One of the primary objectives of this section is to ensure that all investors are treated equally. In a guidance note the NZX states that it wishes to comply with the Securities Markets Amendment Act 2002 requirement to avoid "unfair advantages resulting from inappropriate disclosure of information to some, but not all, investors".
As a result all NZX listed companies are required to adhere to strict disclosure requirements. This compels them to release material information, particularly when it becomes available to any outside party.
But a company does not have to release material information when all of the following three conditions apply:
* A reasonable person would not expect the information to be disclosed.
* The information is confidential, and its confidentiality is maintained.
* The information concerns an incomplete proposal or negotiation, is insufficiently definite to warrant disclosure, is for internal management purposes only or is a trade secret.
These conditions, particularly the second one, facilitate the due diligence of listed companies. Outside parties are given access to important information that is not available to shareholders as long as they sign a confidentiality agreement declaring that they will not pass on this information.
When these outside parties complete due diligence and make an offer, an independent appraisal report is commissioned to assist shareholders in their decision to accept or reject the bid.
Thus bidders who undertake due diligence have significant undisclosed information regarding the target company. Shareholders are heavily reliant on independent reports and directors' recommendations.
The Restaurant Brands' takeover saga began on May 10 when the company signed an undisclosed confidential agreement with CVC Asia Pacific under which it agreed to make information available to the private equity investor on a confidential basis.
On June 14, CVC announced it was making a takeover offer for the fast food company at $1.65 a share. The bid was subject to a number of conditions, including CVC agreeing to certain commercial matters with the US-based franchisers.
On July 13, Falconer made a 164-word announcement stating CVC had not reached agreement with the franchisers, no other party was undertaking due diligence and a draft expert's report had been received from Grant Samuel.
This has been the only communication from directors on the takeover since the June 16 annual meeting even though more than 25 million shares, or 26 per cent of the company, have been traded since the bid was announced.
Falconer has adhered to all his legal obligations, but the level of disclosure to shareholders has been poor.
Why hasn't the Grant Samuel report been released so that investors are in a better position to assess the major factors affecting the target company's valuation?
The Oyster Bay takeover battle also began on May 10 when Peter Yealands made a bid for 44.4 per cent of the company at $3.10 a share. As Yealands already owned 6.7 per cent this would bring his holding to 51.1 per cent if successful. The offer initiated a hostile battle between Yealands and Delegat's, which already owned 32.6 per cent of the wine grower.
On July 20, Yealands upped his offer from $3.50 to $3.60 and severely criticised Oyster Bay for not supplying him with specific information on grape contracts between the company and Delegat's.
The following day, Falconer told the NZX that Oyster Bay was prepared to release this information to Yealands under strict conditions of confidentiality. Falconer said a confidentiality agreement was forwarded to Yealands on July 19 but he refused to sign.
The offer to give Yealands insider information if he signed a confidentiality agreement is consistent with the listed rules, but why should Yealands be given this information and no one else?
The disclosure of insider information to one party is contrary to the overriding objective that all market participants should have the same information.
The drawn-out Metlifecare affair began on December 10 when Cliff Cook, the company's founder, said he was selling his 25 per cent stake. Since then Metlifecare's disclosure has been poor.
At the April annual meeting, chairman Peter Fitzsimmons wouldn't give any details of the due diligence process. He also refused to give a meaningful update of trading conditions since the December 31 balance date.
When Metlifecare released its interim result on July 29, there was almost no supporting commentary whereas 12 months earlier the company released a detailed analysis to the market. After a number of complaints, Metlifecare released a supplementary commentary this week.
The last communication on Cook's share sale, which will require a full takeover offer for the company, was on June 16.
As far as Carter Holt is concerned the NZX released a decision on Thursday that will allow International Paper, which owns 50.5 per cent of the company, and potential bidders to do due diligence.
According to the NZX, "Carter Holt states that a structure has been put in place whereby confidential information, which may include material information in terms of the Listing Rules, is to be supplied to International Paper, and also supplied in a due diligence process to potential bidders".
"Parties to which that information is disclosed will be contractually obliged to Carter Holt to keep it confidential and not to trade in Carter Holt shares while the information remains material information, except pursuant to a full takeover offer under the Takeovers Code for all shares in Carter Holt."
Carter Holt now has NZX approval to allow due diligence, but this column has consistently argued that the process is flawed for a number of reasons. These include:
* There is no incentive for controlling shareholders to promote a full disclosure regime because potential bidders for their shareholdings can do due diligence. The Metlifecare situation is a perfect example.
* All investors are not treated equally. As far as Carter Holt is concerned International Paper and any potential bidder will have far more information than minority shareholders.
* Liberal due diligence rules encourage the takeover of our listed companies. This is because potential purchasers can bid with confidence as they have access to material inside information whereas existing shareholders are more likely to sell because they are less certain about a number of important issues.
The NZX is desperate to keep listings, yet its due diligence rules are encouraging takeover bids.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
Due diligence, always a controversial issue, is in the spotlight again because of bids, or expected bids, for Carter Holt Harvey, Metlifecare, Oyster Bay Marlborough Vineyards and Restaurant Brands.
Why has Bill Falconer, who is chairman of Oyster Bay and Restaurant Brands, allowed an overseas private equity group to do
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