Stock takes: Clamping justice

For investors who lost money in the Feltex and finance company collapses, it probably seems that the wheels of justice driven by regulators such as the Securities Commission and National Enforcement Unit run far too slowly - if at all.

Moreover, the regulators' legal actions offer no prospect of recompense for those who have lost out.

But taking their own civil action against directors or those involved in the preparation of offer documents is fraught with expense and difficulties.

Local brokerages Forsyth Barr and First NZ Capital, with Feltex's directors and the private equity outfits that floated the business, are working to help ensure this remains the case.

They are appealing against Justice Christine French's dismissal of Feltex directors' application to stay Feltex investors' class action against them - which is "supported" by Tony Gavigan's Joint Action Funding. The Feltex directors et al contend Gavigan's support of the action is "champertous".

Champerty, an ancient common law doctrine, was originally based on a desire to prevent legal processes and judges from being suborned by wealthy people who faced no risk if a claim failed.

In recent times it has been viewed as a means of avoiding the plague of unwarranted and vexatious litigation seen in the United States driven by the no-win, no-pay representation model.

As Business Herald columnist Brian Gaynor noted a couple of months back, champerty has been abolished in most states in Australia where funding of class action by litigation funders is more common than here in New Zealand, where champerty remains.

Justice French wrote in her judgment: "In an age when the costs of litigation are beyond the means of many people, professional funders undoubtedly have an increasingly important role to play in ensuring that legal obligations and rights are enforced and vindicated."

The appeal will be heard on November 24.

INVESTIGATION CALL

Talking of litigation funding, Deloitte, which is the liquidator of failed Australian investment bank Babcock & Brown, has written to holders of subordinated notes, including $200 million worth in New Zealand, saying they believe an investigation into the actions of directors and officers is warranted. Trouble is they require about A$600,000 ($735,000) to fund it.

If, at the end of the investigation, they find there is compelling evidence of a case to answer, they speculate the providers of directors' and officers' insurance may come to a mediation or a litigation funder will take over the case for the next step.

Deloitte's view is that if the initial investigation is funded by creditors, then all of them will be in a better position to have funds returned to them than if it was simply handed over to a litigation funder at this stage.

Deloitte says that if around 30 per cent of note holders and other creditors make a contribution of about A$400 each, that will be enough to fund the preliminary investigation.

Stock Takes understands Craig Investment Partners, one of the NZX firms that distributed the subordinated notes to clients, has kicked in money to the fund and has written to its clients to advise them of the situation.

"As with a number of other products out there in the market you try and mitigate the grief that your clients are going through," a Craig's fixed-interest specialist told us yesterday.

HERO TO ZERO

One of the many strands of the tangled Pyne Gould Corporation/PGG Wrightson/South Canterbury Finance capital raising concatenation is the question of how Craig Norgate's Rural Portfolio Investments (RPI) will fare.

RPI largely relies on the dividend stream from its 30 per cent stake in PGG Wrightson and 4 per cent stake in New Zealand Farming Systems Uruguay to meet interest payments on $60 million worth of NZDX listed debt securities.

Will RPI have the cash to participate in PGG Wrightson's capital raising? If not, its stake will be diluted and its income diminished.

In all likelihood it's the lack of certainty around this issue, or perhaps even a growing sense of certainty that RPI's income will take a hit, that has caused the yield on its April 2011 bonds to blow out to 55 per cent this month from an already dubious looking 37 per cent.

Stock Takes has some sympathy for Norgate. He bet the farm on a bright future for the rural sector, but his timing was unfortunate. If not for the credit crunch his various gambles might have paid off. If they had, he would no doubt have been hailed as a heroically bold risk-taking business leader of the type the country desperately needs to help to lift itself into the top half of the OECD.

Unless he manages some Houdini-like manoeuvres to extract himself and his business interests from their present straits, he could be remembered quite differently.

TIME OUT

Remember the Takeovers Panel? That outfit tucked under the wing of the Securities Commission that considers issues related to the transfer of control among businesses? As they say in their annual report, things have been quiet for them of late.

"The global financial turmoil has had a significant effect on the market for corporate control in New Zealand," says chairman David Jones.

"The number of new takeovers in the past year has been the lowest since the code came into force in July 2001."

The panel received just four takeover notices in the 2008/2009 year against 12 over the previous 12 months.

The report also contains a table comparing how busy it expected to be with how busy it was over the year.

It expected it would review about 24 sets of takeover offer documents during the year and ended up reviewing four.

However, this fall-off in transactional activity "has given the panel the opportunity to put more resources into policy work".

That work includes publication of discussion papers on upstream takeovers of code companies such as BG's abortive bid for Contact Energy's parent Origin Energy.

The panel has also moved out from the commission's shadow and as of this month has its own premises, employs its own staff and has its own IT system.

HOLDING THE LINE

Telecom and its shareholders appear to be taking the Government's freshly minted plans for a taxpayer funded $1.5 billion ultra-fast broadband network in their stride.

Telecom shares closed unchanged at $2.68 after the plans were released on Wednesday and actually closed 6c higher at $2.74 yesterday.

Those who follow the company closely have observed that while the plan is somewhat unfavourable for Telecom, which will have to carve off its retail division or cede control of its own investment plans if it wishes to participate, what was released by the Government this week was not much changed from its draft plan.

"It wasn't exactly a lightning bolt," noted one Telecom watcher.

The Government's plans will take some time to implement, with tenders for the 10-year project not decided on until next year.

BIG PERFORMERS RIDING THE SHAREMARKET WAVE

There may be some concern about the sustainability of the rally in equity markets but it's been pretty spectacular nonetheless.

The best performer on the NZX-50, which has itself risen 16 per cent year to date, has been Pumpkin Patch. The children's clothing retail chain's gross return over the period, according to Bloomberg data, has been a tad over 106.4 per cent. Nice. Putting aside dual-listed but predominantly Australian companies, the silver medal goes to Restaurant Brands, with a gross return of 64.7 per cent.

Stock Takes awards the bronze jointly to Fletcher Building and Cavalier Corp, who have delivered investors a gross return year to date of just over 50 per cent.