Verdict: Lion broke the rules

By DITA DE BONI liquor writer

Half a world away last night, Bristol-based liquor giant Allied Domecq reported a feeling of vindication.

But its path to victory is not assured in the race to control Montana Wines.

Yesterday, the Standing Committee examining the legality of Lion Nathan's pre-purchase of just over 22 per cent of Montana on February 8 sided with Allied and its allies, saying Lion had clearly committed itself to buying shares from institutional investors contacted through the actions of its broker, CSFB, before it was legally allowed.

The finding deals Lion a bitter blow as the brewer was gearing up to add more members to the Montana board and eying further wine assets.

But the fate of the ownership of New Zealand's largest wine producer is far from settled.

While Allied Domecq may be rejoicing at the ruling, it remains to be seen how strictly Montana's independent directors will treat Lion's breach of the listing rules.

The board is to meet soon to decide the fate of the brewer within Montana. All that is clear at this stage is that as a defaulter, Lion's representative on the Montana board, chief executive Gordon Cairns, will be unable to vote.

The board, minus Mr Cairns, can vote to confiscate the 21 million shares - 10 per cent of Montana - bought illegally by Lion Nathan and can also decide to strip the brewer of its entire 62 per cent holding - a matter that may yet be referred back to the Standing Committee.

It is possible a third party - supposed to be unrelated to Lion Nathan - may yet be sold the defaulting shares if Lion chooses within 30 days.

In any case, it would be difficult for Lion Nathan to remedy the findings of yesterday, say legal sources close to the case. The findings spell out in detail how material transfers took place within the disputed time of late afternoon and midnight on February 8, with transcripts showing brokers actively solicited sellers, and that the actions were in breach of the exchange's Notice and Pause rules

The finding spends several pages on the issue of CSFB's role as Lion Nathan's agent. It says Lion made no extraordinary stipulations about the way CSFB should go about acquiring shares in Montana, leaving a potential opening for Lion to divorce itself from its broker's actions.

Nonetheless, "the committee rules that Lion Nathan is a defaulter in that each of the 17 transactions identified [by transcripts] constituted a 'transfer' made within the [Notice and] Pause period."

The finding hinged on the actions of Lion's brokers in the hours before 12 am, when the brewer was legally allowed to start buying shares from institutional investors.

The Standing Committee considered that "what happened in the individual cases referred to in the various transcripts was much more than a mere inquiry as to the interest of an investor in the disposal of shares at some different date."

The recorded conversations show evidence that "expressions of interest" become binding after midnight, that brokers called potential sellers several times, that scaling was used as a lever to commit sellers to a conditional agreement and that "several sellers spoke of going to bed, expecting to hear how they had fared in the morning."

"There was no suggestion of subsequent post-midnight discussions with any of them," the findings say.

Brokers spoken to by the Business Herald last night were not surprised at the findings, but also said the practice of book building - where brokers seek indicative expressions of interest for an offering of shares - was common enough.

Don Turkington, head of Cavill White, told the Standing Committee that the use of the term "book building" indicated a "deliberate absence of commitment on the part of the broker or investor."

"Everyone does this, but I guess the existence of another bidder has propelled the matter into the limelight," said one broker who did to want to be named.

Most agreed the finding was no surprise, and one suggested the move showed a "new toughness" about sharemarket issues after the furore surrounding the waiver granted to Lion Nathan which set the issue in motion.