KEY POINTS:
Auckland airport investors may have strong grounds to take a class action suit against the Government for the losses they suffered through Finance Minister Michael Cullen's intervention in the Canadian Pension Plan's partial bid.
It has now been revealed that Treasury strongly recommended against Government intervention to stop the Canadian fund's partial bid for Auckland Airport - a bid that if it had proceeded would have put a total of $1.72 billion into the pockets of shareholders.
Cullen initially asked Treasury to come up with legislation to constrain foreign ownership in the airport to 20 per cent for an individual shareholder (the Mounties had succeeded in their bid for 40 per cent) and impose other conditions.
But what has generally escaped notice is that Treasury also drew Cullen's attention to a potential liability in Auckland Airport shareholders' eyes - for the on-paper losses they would suffer if the Canadian bid was quashed by Government intervention.
Treasury duly produced a draft Cabinet paper which recommended legislating to restrict foreign ownership to 49 per cent (which is the same level Australia imposes on airport ownership) but limiting individual foreign investors to just 20 per cent and imposing related party clauses to stop them from exceeding the 20 per cent individual limit.
Other conditions Cullen wanted, such as making a majority of the airport board New Zealand citizens, were also included.
Treasury did not just constrain its objections to legislation - it recommended against "any intervention" in the Canadian fund's partial takeover.
It raised particularly serious objections to the legislation option on legal, commercial and economic grounds:
It would breach New Zealand's international obligations under various multi-lateral and bilateral free trade agreements.
Legislating would create considerable disruption and uncertainty "by affecting investors' property rights and reducing value, it might cause investors to be sceptical of the certainty of NZ's regulatory environment and more wary of investing in NZ firms".
It was likely to impact negatively on international investors' perception of New Zealand. "Perceptions of a volatile regulatory environment could also increase the risk premium for investment in NZ with the potential to raise the cost of funds for all NZ companies."
No self-respecting Finance Minister could have presented Treasury draft Cabinet paper and associated report to his colleagues. While the draft Cabinet paper downplayed the risks of legislative intervention, Treasury's background report was crystal clear.
Restrictions on foreign ownership were likely to:
Increase the cost of capital to affected companies.
Reduce the sale price available to existing investors.
Limit access to governance expertise and any opportunities for synergies from an international owner.
Reduce the pressure for performance on boards and managers because of the reduced likelihood of takeover of a poorly performing company.
If that's not enough, Treasury also noted Government intervention in this sale process would arbitrarily change the property rights of existing shareholders, which may cause both domestic and foreign investors to be sceptical about the certainty of New Zealand's regulatory environment and therefore be more wary about investing in Kiwi firms.
But the crucial factor as far as the NZX is concerned is that Treasury also noted the Auckland Airport share price was likely to drop immediately following an announcement and existing shareholders were likely to see the Government as responsible for the immediate loss in value of their shares and as such, "potentially liable for the full difference between the new share price and the full value of the CPPIB offer".
Instead of legislation, Treasury suggested amending overseas investment regulations which would present New Zealand with less risk of being in breach of bilateral and multi-lateral obligations.
Shareholders now know Cullen never had any intention of allowing the Canadian bid to go through.
It is arguable that another reason Cullen opted for the fallback option was to try to prevent shareholders from seeking redress.
There's no guarantee a future Government will not intervene in a similar fashion.
What is instructive about Treasury's background paper is that it suggests ministers were concerned about "monopoly rents" going offshore and the potential that a foreign owner might not invest sufficiently in the airport assets.
Treasury said it was difficult to see foreign ownership creating a significant threat to New Zealand's national interests, although it conceded the "very high debt" levels associated with the Canadian Pension Plan's bid might arguably place the company at greater risk of failure. But it considered a foreign investor would - just as much as a New Zealand one - try to maintain the value of the asset.
