Corporate Alert

Articles by Peter Mordue and Daniel Gill

The recent case concerning Jubilee Mines [2006] WASC 199 reiterated the importance of disclosing material information to the Australian Stock Exchange (ASX) for public release, and the potential consequences if a company fails to disclose such information.

On 1 August 1994 Jubilee Mines came into possession of drill results which it did not disclose to the ASX until mid 1996. When the market was made aware of the drill results, the share price rose dramatically. The plaintiff sold his shares between September 1994 and July 1995. He argued that he would have retained them had he been aware of the drill results, which he claimed the defendant had negligently failed to disclose.

Whilst the case turned to some degree on certain specific facts, the court held that a foreseeable loss had arisen as a result of the failure to disclose, for which Jubilee Mines was held liable. Broadly speaking, the loss was calculated as being the difference between the price of the shares when the announcements were eventually made, and the price at which the plaintiff sold his shares.

When considering whether information should be disclosed, the test to be applied is ‘whether a reasonable person would be taken to expect the information to have a material effect on the price or value of securities’. If directors are unsure whether to disclose information or not, then the court suggested that they should err on the side of caution, particularly where the business of the company is speculative in nature, for instance mining, medical research or pharmaceutical research.

The Business Law Reform Bill aims to increase the clarity, efficiency and effectiveness of certain laws affecting commercial entities in New Zealand.

The Commerce Committee has examined the Business Law Reform Bill and recommended that it be passed with certain technical amendments:

• In order to enhance the workability of the proposal to permit the distribution of annual reports by electronic means under the Companies Act 1993, a shareholder is required to elect to receive the annual report within 15 days of receipt of a notice from the company, or elect to waive the right to receive the annual report at all or the board must send the annual report as soon as practicable.
• A transitional provision has been incorporated into the qualification of directors regime, which provides that a current director who is subject to an overseas prohibition order is not automatically disqualified from directorship when this provision comes into force.
• Various changes that have been made to the Financial Reporting Act 1993. These include: the removal of unnecessary or excessive preparation, audit and filing requirements; the decision to increase the size threshold to be a "small company" (to have the simplest form of reporting); and the moves to standardise financial reporting with international standards for ease of reading and understanding.

The amendments to the Companies Act and the Financial Reporting Act will be particularly welcome to New Zealand companies and overseas companies carrying on business in New Zealand. These changes streamline annual reporting to shareholders and introduce new classes of entity with lesser financial reporting requirements.

Government officials are looking for ways to close a loophole in the Takeovers Code after the Takeovers Panel voiced concerns over the use of schemes of arrangement and amalgamation to circumvent shareholder support requirements in some takeovers. The loophole enables businesses to sidestep the Takeovers Code.

The Takeovers Panel’s concerns were intensified when Australian company Transpacific Industries took over NZX-listed Waste Management earlier this year. Transpacific Industries used a court approved scheme of arrangement to structure the deal as a merger, which required a lower level of shareholder support than needed under the Takeovers Code.

Under the scheme of arrangement provisions in the Companies Act 1993, a company can be fully taken over with approval of 75 per cent of shareholders. Under the Takeovers Code, a bidder needs acceptances from 90 per cent of shareholders before it can compulsively acquire the remaining shares and take over the company.

Commerce Minister, Lianne Dalziel, said amendments to the Business Law Reform Bill, "would have gone part way to addressing the Takeovers Panel’s concerns". "It would have created new regulation-making powers, meaning shareholders could have received additional information about a proposed amalgamation," she said. However, the opposition National Party refused to support the changes.

The Securities Legislation Bill (Bill) has recently been passed by the New Zealand Parliament. The Bill aims to boost investor confidence and enhance the integrity of New Zealand’s financial markets.

The Bill amends the Securities Act 1978, the Securities Markets Act 1988, as well as the Takeovers Act 1993 and the Takeovers Code.

The Bill is an important part of the New Zealand government’s wider securities law reform program. The main provisions of the Bill include:

• A new insider trading regime focused on the damage such conduct poses to the efficiency of, and confidence of investors in, financial markets.
• Comprehensive prohibitions against market manipulation – conduct creating a false impression of securities trading activity, price movement, or market information.
• Simplifying and better targeting the substantial security holder regime.
• Improving investment adviser and broker disclosure law by requiring important additional information to be disclosed to clients before giving advice, and by making all disclosures mandatory.
• A complete overhaul of the size and range of penalties and remedies available under securities and takeovers law aimed at deterring illegal behaviour and encouraging compliance.

While most of the Securities Act and Takeovers Act changes would take effect immediately, some of the changes, such as the new insider trading and market manipulation regimes, would come into effect once regulations have been made.

See NZ Corporate Bulletin October 2006for more detail.

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