Brian Gaynor: Vertex in need of clear direction

A challenge by Vertex directors Sandy Maier and Paddy Boyle against the board appointment of Mark Stewart, Warwick Webb and Warren Bell raises important issues.

These include the appointment of directors, particularly independent directors, and the role of large shareholders and their representative directors.

Should a 19.9 per cent Vertex shareholder have effective control or near-control of the board?

Should a Vertex director have full access to confidential commercial information if he is also a director of a major competitor?

These issues are important to Vertex because its largest shareholder has two board seats and is also a shareholder in one of the company's major competitors.

Vertex was listed on July 1, 2002, after a 100 per cent sale by Sydney private equity investor Pacific Equity Partners to the public at $2.05 a share.

The plastics company's five directors were Jon Hartley (chairman), Paddy Boyle (managing director), Simon Pillar (managing director of Pacific Equity Partners), Barry Watts and Doug McKay.

On September 4, just over two months after listing, Vertex issued a profit warning.

This had a devastating effect on the company's share price and a subsequent Securities Commission inquiry was highly critical of the prospectus.

At the end of 2002, McKay resigned from the board after being appointed managing director of Sealord and was replaced by Sandy Maier.

Institutional interest was high - Arcus Investment Management owned 7.8 per cent and AXA 13.3 per cent.

But when Vertex announced its profit downgrade, institutions started selling and Selwyn Cushing began buying a strategic stake.

At 8.57am on February 23 last year, Cushing announced he had a 5.5 per cent shareholding at an average price of $1.27 a share.

This was one minute after JBWere told the stock exchange that it had instructions to buy 19.9 per cent of the company at $1.45 a share.

The next day the purchaser was revealed to be Christchurch businessman George Gould.

He subsequently acquired 19.9 per cent of Vertex and Cushing sold out for a quick profit.

On March 11, Gould was appointed to the board. Ten days later, Hartley, Pillar and Watts resigned and were replaced by Humphry Rolleston, another Christchurch businessman, and Kevin Arscott, a shareholder in the Gould company that bought Vertex shares.

On March 25, Gould was appointed Vertex chairman.

Although he owned only 19.9 per cent of Vertex, he was now chairman and had two of the five board seats. There was also concern that Rolleston was not fully independent because he was from Christchurch and Gould seemed to have more influence than the departing directors over his appointment.

The company has made a slow but steady recovery under Gould's stewardship although its latest results are still below the prospectus forecast.

This year, Gould promoted the float of Mike Pero Mortgages.

He is chairman of Mike Pero and the other three directors are Pero, Rolleston and Arscott.

Mike Pero Mortgages bought Mike Pero (New Zealand) for $15 million in March this year, and money from the float was used to reduce the borrowings raised to finance the purchase.

As a result of this financial engineering, Gould invested $1.5 million in Mike Pero Mortgages and ended up with shares valued at $13.3 million based on the float price of $1 a share.

On September 27, Gould sold his 19.9 per cent Vertex stake to Masthead for $13 million or $2.05 a share. The purchase price was a 40c or 24.2 per cent premium over the market price.

Why did Masthead pay such a high premium for a non-controlling stake? How many board representatives could Masthead expect for its 19.9 per cent shareholding?

On the same day as the Gould/Masthead share transaction, Vertex announced that Gould, Arscott and Rolleston had resigned.

Mark Stewart, Warwick Webb and Warren Bell, all from Christchurch, replace them.

Stewart and Webb are associated with Masthead; Bell, who was appointed chairman, has been classified as an independent director.

Why did Rolleston resign in unison with Gould and Arscott if he was an independent director?

Why was Bell appointed chairman when he had no previous involvement with Vertex?

Meier and Boyle say the outgoing directors nominated Stewart, Webb and Bell in a block resolution and made sure that they were confirmed before they resigned.

Maier and Boyle voted against the resolution but Gould used his casting vote to carry the motion as Rolleston was absent.

It is difficult to understand how Bell could be truly independent if he was appointed through a block resolution.

The result is that Gould was able to obtain a high premium for his 19.9 per cent stake by delivering effective board control of Vertex to Masthead.

This sequence of events led to Maier's and Boyle's announcement yesterday.

They believe Stewart, Webb and Bell were not validly appointed and are seeking an urgent court ruling.

They are also concerned about the disclosure of confidential information to the Masthead nominees.

Masthead owns 39.5 per cent of Alto Plastics in Auckland, one of Vertex's main competitors, and Stewart is an Alto board member.

The disclosure of confidential information is a reminder of the Securities Commission investigation into Brierley Investments and Bing Harris in 1983.

Brierley Investments bought a 20 per cent shareholding in Bing Harris and Brierley executive Trevor Beyer was appointed to the board. Beyer made Bing Harris board information available to Brierley.

The commission took the view that disclosing information on technical know-how, marketing and pricing strategies by a director to a competitor would be a breach of fiduciary duty to the company.

This fiduciary duty has been frequently breached, but Boyle and Maier are the first directors to bring the issue to public attention.

One of the problems with Vertex is that most of the institutions sold out after the profit warning in September 2002 and the company has no large minority shareholders to represent the interests of small shareholders.

The largest institutional holder is the Accident Compensation Commission with 4.5 per cent.

ACC's investment manager, Steve Montgomery, lives in Christchurch, is a director of Pyne Gould Corp and is friendly with Gould.

It would be difficult for the ACC to take an active role on this issue because Montgomery lives in the close-knit Christchurch community from where most of the Vertex wheeling and dealing has come.

Based on the evidence, Gould had far too much control over Vertex relative to his shareholding.

He has managed to transfer this control to Masthead and has received a large price premium for his stake.

Vertex shareholders should be grateful that Maier and Boyle have had the courage to raise this issue in public.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.