Proposal raises thorny issues of jurisdiction

In the third in a series on a proposed transtasman stock exchange merger, BRIAN FALLOW examines the legal problems of a union.

What price sovereignty? New Zealand Government officials and the chief executive of the Securities Commission, John Farrell, are in Canberra for talks with their Australian counterparts about some of the tricky jurisdictional issues raised by the proposed merger of the two countries' stock exchanges.

Whose law should apply to a New Zealand registered company listed on the joint exchange: Australia's, New Zealand's, or both?

There is also the broader issue, says Geoff Connor, of the Ministry of Economic Development, of how much say New Zealand would have in what changes might be made in the future regulatory framework in areas such as insider trading.

The Government's role was facilitative, Mr Connor said. "We shouldn't be second-guessing whether the merger is a good thing or not. That's up to the members of the stock exchange [75 per cent of whom would have to agree]."

New Zealand Stock Exchange chief executive Bill Foster said the proposed merger involved international issues yet to be confronted elsewhere. "If you have an entity [the combined exchange] which operates in two jurisdictions, which one supervises it?"

Some of the questions were fundamental, he said. Did New Zealand need to have different companies or securities law from Australia's? Did it need different regulators?

"The Government has to answer those questions, and how they answer them creates implications for us as an entity which works in that environment."

At present transtasman dual listings of individual companies are based on the principle of mutual recognition. If a company's primary listing is on the New Zealand exchange it is the New Zealand exchange's listing rules and statutory requirements that apply.

In New Zealand there is a reasonably clear-cut distinction between listing rules, which are essentially terms of a contract between the listed company and the exchange, and statutory obligations imposed by Parliament.

Australia's corporations law, however, imposes obligations on Australian-listed companies.

Company and securities law in the two countries is converging. When the takeovers code comes into effect in July, New Zealand will have takeover rules that are similar, though not the same, as Australia's.

The present review of insider trading laws should narrow, though is unlikely to close, the gap between the two jurisdictions in that area.

But there will still be differences and, as Mr Connor points out, the issue remains of who decides future changes.

"But there is no huge urgency in this," Mr Connor said.

"The merger could still go ahead without these matters being finalised.

"New Zealand has sovereignty over what happens in New Zealand and Australia over what happens there. That situation could just continue to apply until final changes are made in the laws."

But an agreement to merge would be more likely against the background of an agreed timetable to harmonise relevant areas of law.

An Australia-knows-best approach is made more likely by the perception (not confined to the other side of the Tasman) that New Zealand's regulatory bodies have been less than consistently fierce in their enforcement role.

John Blair, chairman of the Listed Companies Association, said if there were to be any benefit to New Zealand companies, it would come only from a fully merged exchange, not some extension of mutual recognition.

"With that benefit may come more onerous reporting obligations, but the upside is access to a deeper capital market," Mr Blair said.

"The size of the New Zealand market is sufficiently small that it is restrictive for companies looking for capital for new growth, certainly of any substance."

For Auckland accountant and investor Bruce Sheppard, the woeful performance of the exchange in the core role of capital formation in recent years is an argument for reforming it, not selling it to the Australians.

Mr Sheppard has been involved in raising capital for several high-tech start-ups.

"The reality is that most capital formation is consummated outside the exchange, virtually none within it. That's an indictment," he said.

"They should be saying: 'How do we get new listings and make our exchange an exciting place with businesses we can be proud of?' If they don't do that, what is their role, other than to be taken out by the Australians or someone else at a bargain basement price?"

An opponent of the merger, Wellington merchant banker Lloyd Morrison, argues that many medium-sized and small New Zealand companies would be less likely to be analysed by brokers if they were listed in Australia, making it harder for such companies to raise capital.

The NZ exchange, he said, was well governed and efficient, with the market surveillance panel and the Securities Commission ensuring appropriate regulation and codes of conduct.

"I have had a lot of experience of equivalent bodies in Australia and do not consider the equivalent system to be as good as our own for New Zealand-based companies.

"Unquestionably it will cost significantly more and take more time for New Zealand companies to deal with regulatory organisations in Australia."

Instead of facilitating a merger with Australia, the Government should be pressing the NZ exchange to adopt reporting standards that conform with those of the United States securities and Exchange Commission, the governing body for US markets.

"Australia has proved a weak market for New Zealand companies in terms of capital support.

"While all flows are currently weak, during periods of strength NZ listed companies have primarily garnered support from the US and Europe first and then from Asia. Australian capital market players have never been much more than patronising in their commitment to the success of New Zealand companies," Mr Morrison said.

"I believe the NZ exchange should have a comprehensive programme for adopting US standards so that international investors have few, if any, impediments to trading shares on the NZ exchange."

By adopting US securities rules, but using local governance bodies such as the Takeovers Panel and Securities Commission to enforce them, New Zealand would facilitate global trading without sacrificing present advantages in cost, efficiency and equity.