Gaynor: Insider trading and questions of transparency

By BRIAN GAYNOR

The Kerry Hoggard insider trading case is one of the bizarre business stories of recent years.

Hoggard, one of the country's most respected businessmen, was first accused of insider trading in December 1999. He paid compensation of $58,790 to counterparties to his trades and he has now made a payment of $350,000 to a trust controlled by Stephen Franks, Roger Kerr and Sir Ronald Trotter.

How did these three individuals end up controlling this large sum of money when they did not suffer from Hoggard's alleged insider trading?

Could Franks, an Act list member of Parliament, use this money, which really belongs to all Fletcher Challenge shareholders, for his own political purposes?

The strange story began on December 15, 1999, when Hoggard, then chairman of Fletcher Challenge, bought shares valued at $634,510 in the company's four divisions just before an important announcement. Two days later the shares were valued at $58,790 more than Hoggard paid for them.

Hoggard resigned from Fletcher Challenge and placed $58,790 in a trust account to "reimburse the sellers concerned" for the loss they suffered by selling to him.

The maximum liability for insider trading is the total consideration of the securities (in this case $634,510), or three times the amount of the gain made ($176,370).

Under the insider trading regulations either the aggrieved counterparties to the trade, the public issuer or shareholders acting on behalf of the public issuer can issue insider trading proceedings.

On June 13, 2000, several Fletcher Challenge shareholders, including Kerr, the Business Roundtable executive director, and Catharine Franks, wife of the MP, initiated successful proceedings in the High Court for leave to exercise Fletcher Challenge's rights against Hoggard. Although the MP was not a party to the proceedings it is clear that he has been the driving force behind the case.

He is also opposed to proposed changes to the insider trading laws and wanted to prove that the current laws are effective.

By the second half of last year the parties were ready to go to trial but Hoggard sought to settle out of court. On March 27, the court approved a settlement whereby Hoggard agreed to pay $350,000 to a trust administered by Sir Ronald, Kerr and Stephen Franks. According to Franks the trust "will fund cases against people suspected of breaching important principles of commercial law, and to meet the legal costs of Fletcher Challenge, and the shareholders, in an amount up to $170,000".

That this was settled out of court - apparently as a result of strong pressure from the judge - is unfortunate.

Although Hoggard has now paid out $408,790, excluding his own legal costs, he has not admitted to any insider trading liability.

Furthermore, if the courts had made a decision, any money would have gone to Fletcher Challenge (now Fletcher Forests), probably under instructions from the judge to retain the money, distribute it to all shareholders, distribute it to the aggrieved parties in the Hoggard transactions or donate the money to charity.

Franks argues that the money should not go to Fletcher Challenge shareholders "because it would have just been a windfall to shareholders who had not suffered any loss". But why should it go into a fund effectively controlled by Franks when he did not suffer any loss?

Last week, Mrs Franks sought Securities Commission support for an insider trading investigation against the Prime Minister and a number of Cabinet ministers in relation to Air New Zealand. Stephen Franks wrote the letter to the commission.

Although both the Hoggard case and the approach to the commission over Air NZ were made possible by the MP, a former commercial lawyer, doing the work at no cost, there is room for concern about the possibility of money from the Hoggard-funded trust being used to help finance politically motivated actions.

If Franks is interested in improving the standards of our capital markets he should donate the money to the Shareholders Association. The association would use this money in a more transparent manner.

AFFCO

Affco holds an important special meeting in Auckland this morning which will determine whether Talleys Fisheries can lift its stake in the company from 19.9 per cent to 30.4 per cent. The outcome will have implications for the new Takeovers Code.

Under the code anyone wishing to go above 20 per cent must make a pro rata offer to all shareholders for at least 50 per cent. If the offerer does not reach 50 per cent then all shares received under the offer must be returned, leaving the offerer with no more than 19.9 per cent.

There is one exception to this rule. Under rule 7 (c) of the code a shareholder may increase its holding beyond 20 per cent without making an offer to all shareholders if the transaction(s) is approved at a special meeting of the company.

Talleys is trying to use this provision to raise its stake in Affco to 30.4 per cent without making an offer to all shareholders.

On October 4, the Motueka-based fishing company was issued 20.5 million new shares, or 10 per cent of Affco, at 29.55c each.

Shortly thereafter, Affco had a 1-for-5 rights issue at 25c a share that reduced the average price of new shares issued to Talleys to 28.8c. Talleys subsequently bought shares to bring its holding to 19.9 per cent.

The fishing company is now proposing to buy 28.5 million shares, or 10.5 per cent of Affco, from Auckland investor Hugh Green at 38c a share. This is 6c, or 19 per cent, above the current market price.

The Deloitte Touche Tohmatsu appraisal report identifies several features to the transaction: If the deal is approved, Talleys and Peter Spencer will own just over 49 per cent of the company between them.

Talleys and Spencer will hold four of the eight board seats.

The 30.4 per cent shareholding will allow Talleys to block any special resolution, including any changes to the constitution or a major transaction.

Affco, Spencer and Talleys have informed Deloitte that there are no formal or informal agreements between them.

Affco shareholders should think long and hard before supporting this resolution.

The Takeovers Code allows all shareholders to receive the premium for control yet Affco shareholders are being asked to give this away. If the deal is approved Talleys and Spencer will hold over 49 per cent between them and if Spencer goes to 19.9 per cent their combined shareholding will be 50.3 per cent.

If this eventuates then Affco shareholders will have voted away the premium for control without any apparent advantage to themselves. A positive vote could also set a dangerous precedent for other listed companies.

Support of the proposal could be justified if Talleys was willing to spell out its strategy for the struggling meat company. But the new controlling shareholder told Deloitte that it sees little, if any, direct changes following the transaction. The only identified benefits of the proposed deal are a more stable share registry and "the perceived benefits that another substantial shareholder such as Talleys would bring to Affco in the form of, among other things, its commitment to Affco".

Are these good enough reasons for minority shareholders to give away their share of the premium for control?

* Disclosure of interest: Brian Gaynor is a Fletcher Forests shareholder.

* bgaynor@xtra.co.nz