Part II of the New Zealand Securities Amendment Act 1988 requires substantial security holders in a public issuer to disclose relevant interests, and changes in such interests, to the public issuer and any stock exchange on which the securities are listed. The disclosure regime was enacted to ensure that market participants know the identity of persons in a position to control a public issuer.
The status of substantial security holder arises where a holder has a 'relevant interest' in 5% or more of the voting securities of a public issuer. Disclosure is required when that status is attained and thereafter whenever such status is lost or there is a change in the number of voting securities in which a relevant interest is held equal to 1% or more of the number of voting securities on issue.
The definition of 'relevant interest' received judicial consideration for the first time in the recent High Court decision in Mercury Energy v Utilicorp NZ. The case is notable as the first time a private party, rather than the Securities Commission, the statutory body responsible for enforcing New Zealand's securities law, has sought to enforce the disclosure regime. It is also the first time such an action has been brought in the middle of a takeover battle.
Mercury Energy and Utilicorp are involved in a protracted battle for control of electricity supplier Power New Zealand (PNZ). Mercury recently became aware of an oral arrangement made in December 1995 between Utilicorp and four district councils with respect to the councils' combined 6.86% shareholding in PNZ. Under that arrangement, Utilicorp granted a put option entitling each council, at its discretion and at any time, to require Utilicorp to purchase its shares at a specified price. In return, each council granted Utilicorp a right of first refusal in respect of its shares.
Mercury brought an action claiming the arrangement created a relevant interest in PNZ shares and that Utilicorp's failure to disclose it was a breach of the Act. In finding that a breach had occurred, the court confirmed that the 'relevant interest' definition is very wide. Fisher J relied on Section 5(1)(f)(iii), which provides that a person has a relevant interest in a security if that person "may at any time have the power to acquire or dispose of the voting security". Fisher J held that the words in Section 5(1)(f)(iii) were to be given their literal meaning and so the mere possibility that Utilicorp might one day have the power to acquire the council's shares, either under the put option or the right of first refusal, was sufficient to create a relevant interest.
The Act allows a court to make wide-ranging orders for non-compliance, including forfeiture of shares and suspension of voting rights. While finding that the failure to disclose was intentional, the court was unwilling to make an order which might influence the outcome of the takeover battle. A NZ$50,000 (US$34,000) fine was held to be the appropriate remedy.
Denis Clifford and Chris Maher