Changes to increase the benefits of share purchase plans

Louise Hill, a senior associate in Bell Gully's Corporate team, considers a number of issues associated with share purchase plans including the effect of the proposed Securities (Mutual Recognition of Securities Offerings – Australia) Regulations 2006 (and their Australian counterpart) on these plans and the ability of trustees of employee share schemes to participate in share purchase plans.

Share purchase plans are a relatively new concept in New Zealand - while there were some share purchase plans undertaken pursuant to specific exemptions from the Securities Act - the Securities Act (NZX – Share and Unit Purchase Plans) Exemption Notice 2005 was only gazetted in November 2005.  Since then, there have only been a handful of share purchase plans undertaken by companies listed on the New Zealand Stock Exchange.  However, as companies begin to realise the benefits of undertaking a share purchase plan, this is expected to increase. 

Share purchase plans allow a company to issue up to NZ$5,000 worth of shares (to a maximum of 30% of the shares currently on issue) to existing shareholders utilising a fairly short, simple offer document.  The rationale for the Exemption Notice is that a full disclosure document, such as an investment statement, is not necessary given that issuers are subject to the continuous disclosure requirements of the NZX and thus existing shareholders will be fully informed about the company.

As a full disclosure document is not required, share purchase plans are an inexpensive way of raising capital from existing shareholders.  Share purchase plans also allow small shareholders to participate in capital raising where they may not otherwise have been able to do so because of the cost to the company of preparing a prospectus or investment statement.  For example, both Fisher & Paykel Appliances and Rakon (for whom Bell Gully act) have undertaken or are undertaking share purchase plans in association with a private placement as part of capital raising to fund acquisitions.  In these situations share purchase plans enable a shareholder to increase their investment in a company at a time when the company is expanding.  Share purchase plans may also be undertaken to provide funds for the general development and expansion of the company.  This was the purpose of the ICP Biotechnology share purchase plan, for whom Bell Gully also acts.

This article considers a number of interesting aspects of the share purchase plan and some areas where improvement to the regulation of share purchase plans could be considered, including:

• the effect of the proposed securities (Mutual Recognition of Securities Offerings – Australia) Regulations 2006 and their Australian counterpart on share purchase plans;
  
  
• whether the regulations permit employees holding shares through employee share plans to participate in the share purchase plan; and
  
  
• the impact of the treatment by NZX of share purchase plans as being a rights offering.

Securities (Mutual Recognition of Securities Offerings – Australia) Regulations 2006

Mutual recognition regimes allow each country to retain their own standards, while removing barriers to trade between them.  The mutual recognition of offers of securities scheme allows an issuer to extend an offer that is being lawfully made in one country to investors in the other country without the issuer being required to comply with most of the substantive requirements of the host jurisdiction's fundraising laws that apply to domestic offers.

The proposed regulations give effect to the Trans-Tasman Mutual Recognition of Offers of Securities and Managed Investment Scheme Interests regime.  When enacted, these regulations will allow the offer of securities and managed investments to be made by an Australian company in New Zealand using the same offer documents that the company uses in Australia.  Similarly, the equivalent Australian legislative amendments, the Corporations Amendments (NZ Closer Economic Relations) Bill 2006, will allow New Zealand companies to offer securities in Australia using the New Zealand offer document.

The mutual recognition scheme aims to overcome mutually inconsistent requirements that may exist between national regulatory frameworks and to reduce compliance costs associated with the need to comply with the different regulatory requirements of different jurisdictions.  The proposed scheme is intended to reduce duplicated regulation, and thereby facilitate investment between New Zealand and Australia, enhance competition in capital markets, reduce costs for business and increase choice for investors.  The scheme achieves this by allowing entities from New Zealand to offer securities into Australia on the basis of compliance with the New Zealand fundraising requirements and with minimal additional requirements imposed by Australian law.  This is intended to reduce costs significantly for New Zealand issuers, as they will no longer be required to prepare separate documents to comply with Australian regulation, and vice versa. 

At present, New Zealand companies must be listed on the NZSX in order to take advantage of the Exemption Notice for share purchase plans.  ASIC's present position appears to be (although it is not entirely clear) that New Zealand companies listed on the NZSX but not listed on the ASX may not make an offer under a share purchase plan complying with the Exemption Notice to Australian resident shareholders, without preparing a full disclosure document under the Corporations Act 2001 (Cth).  Conversely, Australian companies listed on the ASX but not listed on the NZSX may make an offer under a share purchase plan complying with the Australian Class Order to New Zealand resident shareholders because of the Securities Act (Overseas Listed Issuers) Exemption Notice 2002.

The mutual recognition regime may resolve this problem by allowing New Zealand companies listed on the NZSX to offer to Australian resident shareholders utilising a short form offer document that complies with the Exemption Notice.

Corporations Amendment (NZ Closer Economic Relations) Bill

The Corporations Amendment (NZ Closer Economic Relations) Bill 2006 provides that certain rules (including Chapter 6D other than section 736), do not apply to eligible recognised offers.  An offer of securities is a "recognised offer" if the following conditions are met:

• the person proposing to offer the securities must be a person incorporated by or under the law of the recognised jurisdiction (which in this case would be New Zealand) or must fall within one of the other classes of person (such as a natural person resident in New Zealand);
  
  
• the person proposing to offer the securities must not be banned under section 1200N;
  
  
• the proposed offer must be an offer of a kind prescribed by regulations in relation to the recognised jurisdiction; and
  
  
• at least 14 days before the day on which the offer is first made in Australia, the person proposing to make the offer must lodge with ASIC a notice in the prescribed form of the person's intention to make a recognised offer, and the documents and information required to be lodged by section 1200C of the Corporations Act.

Effect of mutual recognition regime on share purchase plans

New Zealand issuers will be permitted to extend an offer under a share purchase plan to shareholders resident in Australia if the offer under the share purchase plan could be considered to be "an offer of a kind prescribed by regulations in relation to the recognised jurisdiction".  The regulations have yet to be drafted so it is not yet certain whether a share purchase plan will be prescribed by the regulations.  We would expect that the mutual recognition regime should extend to the offer document prepared in relation to a share purchase plan, allowing an entity listed on the NZSX to make its share purchase plan open to Australian resident shareholders, and to provide those shareholders with the same offer document (amended to include the "health warning" required by the Australian legislation) that it provides to its New Zealand shareholders.

Since the rationale for the exemption of share purchase plans from securities legislation requirements applies to shareholders that are resident in both New Zealand and Australia, it makes sense to extend the mutual recognition regime to share purchase plans.  In relation to entities listed on the NZSX, Australian shareholders are able to access information in relation to those entities on the NZSX website, and Australian shareholders receive annual reports and other information relating to the NZSX listed issuer.  Similarly, New Zealand shareholders can access information on ASX listed entities through the ASX website.

The mutual recognition regime will still not solve problems for companies that are dual listed.  There is a slight inconsistency between the New Zealand Exemption Notice and the Australian Class Order relating to the treatment of "custodians".  In New Zealand custodians need only give a certification when applying for shares on behalf of beneficial owners, while in Australia custodians must be "noted as such" on the share register in order to make an application on behalf of beneficial owners.  Given that both the Exemption Notice and the Class Order require that the offer must be made on the same terms to all shareholders, companies have to find a way to comply with the requirements of both the Exemption Notice and the Class Order in relation to custodians.  Fortunately at least some share registries in New Zealand "code" custodians on the share register, which solved the problem for Fisher & Paykel Appliances in their share purchase plan last year.  However if this is not always the case, then it may be that an exemption from the Australian Class Order would be required in order to allow for custodians to acquire shares on behalf of beneficial owners.  This would seem to negate somewhat the advantages of the share purchase plan as being a relatively simple, inexpensive capital raising method.  Ultimately, it may be that little can be done and the differences are a consequence of the different laws relating to companies in New Zealand and Australia.

Employee share schemes

The definition of "custodian" in the Exemption Notice is not, in general, wide enough to allow trustees of employee share schemes to acquire shares on behalf of the beneficial owners of shares under the employee share schemes.  To be a "custodian" for the purposes of the Exemption Notice (and thus be permitted to acquire up to NZ$5,000 of shares per beneficial owner), a custodian must be one of the following:

• a trustee corporation or nominee company which holds securities by reason only of acting for another person in the ordinary course of business of that trustee corporation or nominee company; or
  
  
• a bare trustee holding securities on trust.

Most employee share scheme trustees would not fall within the first limb of this definition, as they are generally not trustee corporations or nominee companies, and do not hold shares as part of the ordinary course of business.  Employee share scheme trustees would often not fall within the second limb either, since they generally have some level of discretion in relation to the employee share scheme, thus disqualifying them as bare trustees.

Some companies are disappointed that their employees, holding shares through an employee share scheme, are not permitted to participate in the share purchase plan.  We wonder if it would be useful to amend the Exemption Notice to add a third category to the definition of "custodian", namely trustees of employee share schemes.  This would be a very limited category and would allow employees to participate in capital raising of the company they work for.

Rights offering

The NZX treats a share purchase plan as a rights offering, unlike the ASX in Australia.  This means that listed issuers must comply with the requirements of NZSX Listing Rule 7.10, which sets out the timing and process requirements for rights offerings.  One of these requirements is that the issuer must give ten business days' notice of the record date, utilising the appendix 7 form.

There are a couple of points we have noticed that flow from this requirement:

• appendix 7 in its present form does not happily "fit" with share purchase plan information, particularly as to the price and number of shares to be issued, as this information is often not known ten business days before the record date.  This is a small administrative matter that is easily rectified by the preparation of an amended Appendix 7;
  
  
• allowing ten business days' notice may have the unintended effect of encouraging the public to acquire a small number of shares, in order to make them eligible to participate in the share purchase plan, under which they are offered shares at a discount to average end of day market price over a specified period.  This is not the purpose of the share purchase plan; it is not to encourage people to buy 100 shares so that they may subsequently acquire up to NZ$5,000 at a discount.  This potential effect is an unfortunate consequence of the requirement to notify the record date ten business days' in advance.  If it proves to be a material issue, the notice period for the record date could be reduced and the period for which the offer is required to be open could be extended.  Any amendment to the notice period should still allow custodians to undertake all necessary processes to obtain instructions from their beneficial owners.

Conclusion

The share and unit purchase plan scheme benefits both issuers and their shareholders by providing an inexpensive and relatively simple capital raising method.  Issuers and their shareholders will benefit further when NZSX listed issuers are permitted to offer to Australian registered shareholders under share purchase plans.  Some small tweaks are however required to strengthen the scheme, including, in particular, by allowing employee share schemes to participate.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.