In a supplementary submission to the Committee, arising from the latter’s request last week to consider two other entitlement dates, the Exchange offered both the AMP and Tower demutualisations as examples of the most appropriate setting of a record date.
Chairman Mr Simon Allen told the Committee that "record dates are commonly used to determine the day entitlements crystallise. It is not uncommon for record dates to be fixed on or close to a day an announcement is made in respect of an event which would trigger an entitlement right or obligation. For example under the AMP demutualisation the first record date for entitlement was the day before the AMP board voted in favour of demutualisation. Similarly, Tower Ltd's record date was the day the Tower board resolved to proceed with demutialisation”.
The Exchange submitted that “the purpose of setting a qualifying date was to provide certainty to departing and new members. While establishing a record date for entitlements means that full members who join after that date will not have an entitlement to initial shares in the company, not establishing a qualifying date creates a loss to full members as at that date, since current full members entitlements could be diluted by a rapid increase of membership for short term opportunistic reasons".
“Given this, the Exchange thinks the qualifying date is the fairest way to balance the competing concerns of protecting existing members while providing certainty to new members”.
According to Mr Allen "The Exchange does not support an amendment to the qualifying member definition. There is no basis which is not arbitrary for determining any other date and the Exchange considers changing the date creates uncertainty on a matter which to date has been addressed in a consistent and certain manner”. However Mr Allen said he was concerned to ensure the qualifying membership issue did not overshadow the main purpose of the Bill and the benefits of demutualisation. He said the NZSE was willing to discuss the issue in more detailed fashion with the Select Committee.
Mr Allen also completed the Exchange's submission on the proposed 10 per cent share cap to be applied to investment in a demutualised and listed Stock Exchange.
Mr Allen told the Select Committee that on demutualisation, voting of Exchange members would be in proportion to share ownership, “Some concern has been expressed that this could possibly lead to one or more persons being able to control the Exchange in a way which was not in the beast interests of New Zealand’s capital markets. This concern is recognised internationally and most demutualised exchanges have implemented ownership limitations”.
Mr Allen said the rationale for the ownership limitations 'is to address concerns about the potential effects of a significant transfer in control of the Exchange. The Exchange's Board considers that the 10 per cent threshold would address this concern”.
White one entity holding 10 per cent was “unlikely to be in a position to control the Exchange, 10 per cent ownership should be of sufficient economic significance to encourage a significant shareholder to invest time, energy and expertise in the governance of the Exchange”.
Internationally share caps or limitations of between 5 and 15 per cent were relatively common, with some caps being statutory (for example the Australian Stock Exchange 5 per cent cap which will shortly be changed to 15 per cent) while others were contractual such as the 4.9 per cent London Stock Exchange cap.
Mr Allen said that “the Exchange supports a contractual cap over a statutory one as it permits a higher degree of ongoing flexibility. Shareholders by special resolution can then determine whether reducing or increasing the cap, or conditionally waiving someone exceeding the cap, is in the best interests of the Exchange or its shareholders.
"An inflexible cap could in some circumstances be more damaging than no cap at all having a control cap over an institution that is no longer utilised adds little or no protective value to the New Zealand capital market” Mr Allen said.
The Exchange made a submission for one proposed amendment to the bill relating to taxation, and noted it had support from the Inland Revenue Department and the Treasury.
The amendment to clause 13(2)(a) of the bill enables a qualifying member who is issued shares by the company on the restructuring day is regarded as having: “Acquired the shares for a cost equal to the value immediately before the restructuring day of the members ownership entitlement, determined under the method or statement referred to in section 6(l)(a)".
The Exchange notes that the proposal of the original clause was to address the concern that due to a potential technical deficiency in existing tax legislation members would not have a cost basis for the share they are issued with under the restructuring plan. “This could create uncertainty as to the amount of tax (if any) that they might be liable to pay if they on-sold their shares”.
The amendment means that a qualifying member would be deemed to have acquired shares in the company for a cost equal to the value of that members interest in the Exchange on the day immediately before the restructuring, rather than on the day the restructuring occurs, as currently provided in the Bill.
The Exchange told the Committee that it would be “highly desirable” to have the Bill reported back to the House by 24 July 2001 (or earlier), to enable the bill to pass through its final stages by 5 September 2001 so the restructuring proposal can be considered at the Exchange's 2001 annual meeting, normally held in August /September, but which must be held no later than the end of October.
