Given NZX is bleeding listings, one would hope it wouldn't want to lose any it already has. Photo / File
COMMENT:
If you believe NZX's listing rules exist to protect investors, it makes no sense to punish infractions that hurt them by fining those same investors.
And NZX Regulation's choice of target is too often the market's minnows, those who would be most burdened by fines and least able to fight back.
NZX's Disciplinary Tribunal is an independent body made up of 22 people with senior business and/or legal backgrounds, three being assigned to each case. It can only decide cases referred by NZX Regulation.
The three cases decided so far in 2020 beg the question of why anybody would think it worth spending time and money investigating their NZX rule breaches.
They also beg the question whether it's worthwhile such small companies remaining listed on NZX.
Given NZX is bleeding listings, and its stated aim of growing listings, one would hope it wouldn't want to lose any it already has.
Last week, NZX chief executive Mark Peterson was upbeat about the future: "We feel good about what's in front of us" in terms of new equity, fixed income and fund listings, he told BusinessDesk.
The penalties in the three cases need to be read in light of the fact that the tribunal can impose fines of up to $500,000.
Enprise Group, with a market capitalisation of $9.5 million, was fined $35,000 plus costs and publicly censured for being 14 business days late in filing its annual report. It was the company's second such offence.
Chatham Rock Phosphate, market cap $3.8m, was fined $25,000 plus costs. Chatham Rock's primary listing is in Canada and it failed to file all the notices it filed in Canada to NZX as well.
Geo, market cap $6.7m, was fined $40,000 plus NZX costs of $30,000 after NZX questioned the timing of when it decided to write down the value of an asset.
In all three cases, it's the shareholders who had to pay the fines and costs, having already footed the bill for whatever it cost their companies to engage with NZX Regulation and the tribunal. Arguably, those shareholders were the primary victims of their companies' transgressions.
The Geo case was decided by Rachael Reed QC, who also chairs the tribunal, James Ogden, who sits on the Summerset and Vista boards and previously chaired Tegel, and Richard Keys, chief executive of Abano Healthcare.
They acknowledged in their censure note that the case was "a matter of delicate commercial judgement" and that they saw "no evidence to suggest that Geo's breach was intentional or arose as a result of recklessness or negligence."
Geo's offence dates back to March 2018 when the company was preparing its results for the six months ended December 2017.
Directors noted its GeoSales product's results showed "a modest negative variance," but performance had been better post-balance date. So, after consulting the auditor, they decided the asset's value didn't need writing down.
But NZX noted that accounting standards require "future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing an asset performance must be excluded when measuring the value in use of the asset."
NZX asked the Financial Markets Authority what it thought and it agreed that Geo had "inappropriately applied the accounting standards."
"The breaches were significant because of investors' participation in placements and rights issue occurred after the breaches but prior to Geo's impairment announcement," the tribunal said. Geo's management and board contributed 43 per cent of the money raised.
It also noted that, when the $5m write-down was announced on Aug. 29, "there was no change in Geo's share price" so the information didn't alter shareholders' view of Geo's value.
On June 12, 2018, Geo had warned the market of a likely write-down of GeoSale's value, then $8m, and the very next day announced a rights issue to raise $1.6m.
The previous month, it had raised $2m from a placement to institutional investors and debt totaling $2.4m, mostly owned by chair Roger Sharp's interests, was converted to equity, the tribunal said.
It noted that there had been no pattern of breaches by Geo and it had never before received an infringement or been referred to the tribunal.
BusinessDesk asked if anybody had complained to NZX about Geo – they hadn't. And NZX didn't mention that National Business Review had published a satirical column by Tim Hunter on June 22, 2018 criticising the company for raising fresh capital while maintaining GeoSales' book value.
The investigation of Chatham Rock wasn't prompted by any complaints either.
It was decided by Mariette van Ryn, an independent director and previously a Westpac executive, Jo Appleyard, a Chapman Tripp partner and Ryman director, and Chris Swasbrook of Elevation Capital Management.
Chatham Rock chief executive Chris Castle noted his company isn't an operating business – its sole purpose currently is trying to gain official permission to mine phosphate from the sea floor off the South Island – but it still has to publish quarterly reports to comply with its Canadian listing.
"The missing announcements contained information already known to the market and not any new material information," Castle said in a statement when the censure was published.
The Enprise case was decided by Ogden, TIL Logistics chair and former Abano chair Trevor Janes, and Keys.
Enprise should have sent its 2019 annual report to NZX by July 31 last year but it warned the exchange on July 29 that it was unlikely to meet the deadline because its auditor, Staples Rodway, wouldn't sign off its accounts.
When NZX checked back with Enprise on August 6, the company said "its auditor was working as fast as it could," and that Enprise expected completion by August 9. NZX went ahead and suspended trading in Enprise shares from August 8.
Enprise finally released its annual report on August 20 and NZX reinstated trading in its shares.
"NZX advises that following the release of the 2019 annual report there was no change in Enprise's share price and that only one trade occurred on Aug. 20, 2019 for eight shares valued at $5.28 in aggregate," the tribunal said.
After the delay, Staples Rodway qualified the accounts, saying it was unable to determine the value of two Enprise associated companies, collectively valued at just over $3m in Enprise's accounts. Enprise then owned 47.1 per cent of Kilamanjaro Consulting and 19.9 per cent of ISell.
Enprise chief executive Elliot Cooper told BusinessDesk he's disappointed by the censure. "We were working as hard as possible but we were relying on a third party," namely Staples Rodway.
"They needed to be comfortable with our valuations of entities we don't control. The auditors just couldn't get comfortable with the valuations."
Enprise's previous breach was in 2016 when it was three days late because its auditor, UHY Haines Norton, had resigned two days short of its balance date.
Cooper said Enprise had been its auditor's only listed client and that the fees it received from Enprise were less than the fees the FMA was charging to allow it to audit a listed company.
NZX Regulation hints that the process could have been much worse for these companies. Referrals to the tribunal "are intended to enable more streamlined outcomes for conduct in breach of the NZX market rules than would be the case for civil proceedings," it said.
"Those referrals remain, however, subject to the requirements for due process and robust investigation."
But perhaps NZX Regulation should conduct a cost-benefit analysis of each of the cases it might pursue.
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