Brian Gaynor: Hart neuters independent directors

Graeme Hart is an extremely smart and determined individual.

The Carter Holt Harvey takeover demonstrates that he is prepared to use every trick in the book to reach his 90 per cent target and move to compulsory acquisition.

This includes asking Kerry McDonald and Helen Nugent, two independent directors, to resign when he still had only 50.5 per cent of the target company.

He also requested, and was granted, a waiver by the NZX that allowed Mark Burrows, an associated person of Hart, to be declared an independent director of CHH.

Hart extended the takeover offer from October 13 to November 3 after the market closed on the former date.

Finally, Burrows, who was involved in the controversial Bank of New Zealand takeover 13 years ago, has been appointed chairman of the audit committee ahead of next week's third-quarter result.

A key aspect of Hart's $2.50 a share takeover offer was the agreement with International Paper that the latter would accept in respect of its stake the day after the formal documents were mailed to CHH shareholders. This allowed Hart to declare the offer unconditional on September 16.

Five days later, the five International Paper directors resigned, replaced by Hart, Burrows, Tom Degnan, Tim Hardman and Bryce Murray. The last two are employees of Hart's Rank Group, Degnan is managing director of Burns Philp and Burrows a director of the Sydney-based food group.

Under NZX listing rules, Burrows, who is an associated person of Hart because of his Burns Philp board position, cannot be an independent director of CHH.

But the NZX granted a waiver that allows Burrows to be classified as an independent director. The decision was based on several reasons, including the belief that Burrows' position as an independent director of Burns Philp would not influence, in a material way, his decisions in relation to CHH.

For those with long corporate memories, Burrows is the individual in Baring Brothers Burrows, the Sydney-based company that wrote the independent appraisal report on the Bank of New Zealand when it was subject to a 1992 takeover offer from National Australia Bank.

That report was highly controversial and hopelessly underestimated the future profitability of the BNZ. Baring Brothers Burrows was required to publish a supplementary report, but it offered no consolation to minority shareholders opposing the offer.

After obtaining the Burrows waiver, Hart asked McDonald and Nugent to resign from the CHH board even though he had little more than the 50.5 per cent stake acquired from International Paper.

The ironic twist to this is that McDonald was a BNZ director in 1992 and is now chairman of the bank.

The two CHH independent directors had important positions. McDonald was chairman of the committee of independent directors assessing Hart's offer and Nugent was chairman of the powerful audit committee. The other independent director, before the Burrows waiver, was chairman John Maasland.

After much deliberation and consultation, McDonald and Nugent decided to resign, mainly because Hart could dismiss them by calling an extraordinary meeting.

When tendering their resignation, they specifically requested that the NZX announcement include a statement that they had been asked to.

The October 4 NZX release made no reference to McDonald and Nugent resigning because they had been requested to do so by the new controlling shareholder.

What is the point of having page after page of corporate governance material in annual reports if independent directors are forced to resign during the early stages of a takeover and the NZX grants a waiver that allows an associated person to be deemed independent?

The two resignations don't take effect until the end of the offer period, but they clearly demonstrate that Hart was prepared to exert full control even when he held only 50.5 per cent. McDonald and Nugent's influence has been seriously undermined and the latter is no longer chairman of the important audit committee.

Hart made another smart move when he waited until 5.52pm on October 13, the day the offer was originally supposed to close, to extend the bid.

By waiting until the market closed, he was able to crystallise a 68.6 per cent holding. If he had extended the offer earlier he would probably have little more than 55 per cent because most large shareholders only accept at the last minute.

The next big development is CHH's third-quarter profit announcement on Wednesday. This is where the audit committee plays an important role.

A major task of this committee is to oversee all financial statements released to the NZX. It plays a particularly important role in quarterly announcements because these are not normally subject to the scrutiny of external auditors.

Membership of CHH's audit committee is restricted to non-executive directors and the majority must be independent. The chairman must also be independent and not be the chairman of the board.

Until recently, the committee consisted of Nugent (chairman), Maasland and Andrew Lessin, an International Paper employee.

The new committee, which was appointed this week, comprises Burrows (chairman), Maasland and Bryce Murray, Hart's right-hand man at Rank. This is where the Burrows NZX waiver is important. If the NZX had not granted the waiver then either McDonald or Nugent would have to chair this committee. But once granted, the waiver allowed Hart to request Nugent and McDonald to resign and facilitated the appointment of Burrows as chairman of the audit committee.

What is the point of having extensive corporate governance regulations when a NZX waiver allows an associated person of the bidder to chair the audit committee during a takeover offer?

Last week's column quoted an Australian director who argued that company directors should be more red-blooded in their defence of undervalued takeover offers. This sentiment should apply to CHH, but Hart has effectively neutered the company's independent directors by asking two-thirds of them to resign and by replacing Nugent as chairman of the audit committee.

Grant Samuel has valued the company between $2.55 and $2.95 a share, which offers the independent directors a strong case to put to minority shareholders.

But the response from the committee of independent directors has been relatively muted. It has been far more restrained than Baycorp Advantage's response to the recent Allco Equity bid.

The typeface on Hart's "Why you should Accept this Offer" letter is much bigger, bolder and more prominent than the "unanimously recommend that shareholders not accept the takeover offer" statement from the independent directors.

A letter from Hart to CHH shareholders this week emphasised items in bold type. These included the company's second profit downgrade on September 12, continuing difficult trading conditions and strike action.

We can expect to hear more at next week's profit announcement.

Hart is determined to get 100 per cent control of CHH and the sidelining of McDonald and Nugent and promotion of Burrows indicates he will use every trick in the book.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and a CHH shareholder.

Carter Holt Harvey timeline

* 17 August - Graeme Hart agrees to purchase 50.5 per cent of CHH from International Paper at $2.50 a share.
* 31 August - CHH receives a takeover notice from Hart and appoints a committee of independent directors comprising Kerry McDonald (chairman), Helen Nugent and John Maasland.
* 12 September - CHH issues a profit warning: "Price recovery that had been expected in the third quarter has not materialised. Earnings may be down by about $25 million to $30 million versus the company's previous forecast of $283 million."
* 15 September - Hart dispatches the takeover offer. CHH's independent directors state that the offer is not fair after the receipt of Grant Samuel's valuation ($2.55 to $2.95 a share). They unanimously recommend that shareholders should NOT accept the offer.
* 16 September - International Paper accepts the bid and Hart announces that it is unconditional.
* 21 September - Hart becomes the beneficial owner of 50.5 per cent of CHH after making payment to International Paper. Robert Grillet, Andrew Lessin, Brian McDonald, Jonathan Mason and Maximo Pacheco resign as directors and are replaced by Mark Burrows, Tom Degnan, Tim Hardman, Graeme Hart and Bryce Murray. NZX grants CHH a waiver allowing Burrows to be classified as an independent director.
* 4 October - Kerry McDonald and Helen Nugent announce their resignation from the board.
* 13 October - Hart reaches 68.6 per cent and extends the offer from October 13 to November 3.
* 26 October - CHH is scheduled to announce its third-quarter earnings.