Brian Gaynor: Shareholders turn policemen

The Richmond/PPCS case highlights the difficulty of enforcing securities regulations in New Zealand.

Security regulation enforcement has been almost totally privatised in this country. This means that shareholders, rather than a central enforcement agency, have to police the rules. There are a few exceptions, notably the Securities Commission's ability to monitor prospectuses and substantial security holder notices.

But the commission is hopelessly underfunded and is reluctant to take a major enforcement role after the unsuccessful substantial security holder notice case against Sir Robert Jones in 1993. This blew a big hole in the watchdog's meagre budget.

The commission's report on Wakefield Hospital's prospectus highlights the situation on enforcement in New Zealand. The report concluded:

* "The commission's findings have highlighted possible breaches of securities laws."

* "The commission refers this report to the shareholders of Wakefield Hospital, who subscribed for shares in the IPO, for them to consider the questions of civil liability and the question of voidable allotments. Whether any action should be taken is a matter for those shareholders to determine."

Hawkes Bay lawyer Robin Bell, former Richmond chief executive John Foster and eight farmer shareholders started the case against PPCS. The 10 individuals own less than 3 per cent of Richmond between them.

They were later joined by Richmond, but the Securities Commission could have taken the action as it has a statutory obligation to administer the substantial security holder notice regime.

The litigant shareholders have taken a huge risk, because they will receive no money if the case is successful, but will be risking big losses if the decision goes against them.

Justice William Young found in favour of Bell/Richmond and awarded costs against PPCS. The Dunedin-based defendant has appealed, which will expose Bell and the other shareholders to extra risks and further costs.

The litigants would normally expect PPCS' payment of costs to be deferred until after the appeal process.

In an important decision, Justice Young ordered PPCS to pay costs, estimated at $850,000, to Bell and the other shareholders before the next stage starts.

If an appeal against the order for costs is successful, then the shareholders will have to refund the over-payment. Costs to Richmond will not be paid until the appeal process is completed.

Justice Young's order allows the 10 plaintiff shareholders to stay in the proceedings. But a regulatory regime that relies on shareholders to enforce the rules at considerable personal risk and for no rewards, with the Securities Commission sitting on the sideline, does not encourage investor confidence.

Air New Zealand

The proposed Air New Zealand/Qantas deal has major implications for the business sector.

It could accelerate the move to a more regulated economy and be the final nail in the coffin for the economic reforms of the 1980s and 1990s.

Two main pillars of the economic reforms were privatisation and creating an open and competitive economy. Ansett New Zealand's setting up in 1987 and the privatisation of Air New Zealand two years later were important landmarks in these reforms.

For the first time domestic air travellers had a genuine choice and the shackles of government ownership were removed from our national airline.

A decade and a half later the situation has been almost totally reversed, Air New Zealand is 82 per cent government-owned and the company is arguing that New Zealand is too small to have a truly competitive airline market.

Ralph Norris, Air New Zealand's chief executive, is treading a delicate path. As a former chairman of the New Zealand Business Roundtable, the main cheerleaders of privatisation and an open economy, he made many speeches criticising attempts to reduce competition and reregulate the economy.

Roger Kerr, the outspoken executive director of the Business Roundtable, usually breaks into a cold sweat at the mere mention of reduced competition or increased regulation, yet he has not spoken out against the proposed transtasman airline deal.

Ironically the role of the Business Roundtable in promoting a deregulated and competitive economy means that there is widespread opposition to the Air New Zealand/Qantas proposal.

Norris is the figurehead of a huge public relations exercise trying to convince the public that a near-monopoly and reduced competition in the airline industry is good for the country. The business community sees this as an extremely dangerous campaign, because Norris must get the Commerce Commission and the public to buy into this story.

They will only do so on the basis that the airline industry, which will be dominated by a near-monopoly, should be more heavily regulated. The electricity, telecommunications and airport sectors are already becoming more regulated and a similar move in the airline industry could accelerate this trend.

Norris told Auckland corporate treasurers in 2000 that the Government must act "in the overall national interest rather than the interests of narrow constituencies".

A near-monopoly may suit Air New Zealand, but a major campaign to convince the public that this is an acceptable industry structure in a small country is not in the best interests of the wider business community.

Kiwi Income Property Trust

Jim Taylor, a Kiwi Income Property Trust unit-holder, raised the most important issue at the property group's annual meeting. He asked why the trust had become involved in two high-risk developments, when its main aim is to be a low-risk property investor.

Kiwi Income Property Trust's main objective, as the name implies, is to invest in prime properties that generate high-income returns. According to the 1993 prospectus, "in order to minimise the trust's exposure to the risk of values declining, the trust invests in prime New Zealand real estate, purchased by the managers in arm's-length transactions which, in today's market, are often at a cost that is below replacement cost".

This strategy has proved to be highly successful and the trust is now ranked in the top 20, in terms of size, in the NZSE40 Index.

Its one obvious failure was the development of the Royal & SunAlliance Centre. Investors in this special-purpose development vehicle lost money, although the centre was later bought by the trust and is now making money.

The trust is involved in two major development projects - the $90 million extension to the Northlands shopping centre in Christchurch and the proposed $300 million Sylvia Park development in Mt Wellington.

Chairman Jim Syme and chief executive Angus McNaughton said the Northlands project was relatively small, $90 million compared with total assets of $875 million, and Sylvia Park would be a joint venture with an unnamed party.

But Taylor's pointed question created a sense of unease. There are plenty of high-risk property development projects available for investors, but only a limited number of high-quality, low-risk vehicles.

Why doesn't Kiwi stick to its successful business model and continue to offer a low-risk high-income alternative for conservative investors?

* Disclosure of interest: none

* bgaynor@xtra.co.nz