Editorial: Get sharemarket back on the rails

The New Zealand Stock Exchange has seldom seen a darker hour than that when Lion Nathan was given a head start over a rival bidder for the acquisition of Montana Group. It is small consolation to 10,000 small shareholders in Montana that from July it will not be possible for corporate takeover offers to exclude them in the way that Lion's bid has done.

The decision of three members of a market surveillance panel to let the brewer steal a march on Montana's preferred buyer defies justification. In its explanation, the panel admits it did not foresee that Lion would use a waiver to pursue off-market transactions before the market opened on Friday. It should have foreseen exactly that. Allied Domecq of Britain, offering $4.40 a share for all of Montana, had been trumped by Lion Nathan's offer of $4.65 for just enough shares to bring its holding to 50.1 per cent. But while Allied was observing the rules of the exchange, waiting a few days for investors to assess its offer, Lion was free to do deals with institutional investors overnight.

Lion's price was about as good as the stock could get; if there was much prospect that Allied would raise the bid, Lion would not have been able to secure the deals it did at that stage. But its offer should have been made to all holders of the stock on a pro rata basis. That would have satisfied the takeover code to be imposed on the exchange from July. And, of course, the Lion offer should have been subject to the same delay that Allied was observing. The British company is just the latest to discover how disorderly our sharemarket can be.

Local investors, too, whose brokers were not among those favoured with approaches from Lion last Thursday night, have been let down by the market surveillance panel. The fact that more restrictive regulation is just five months away is no reason to excuse the panel's strange decision. Nor is it sufficient for the board of the exchange to curtail the panel's discretion to grant waivers in future. Unless satisfactory explanations are forthcoming soon, there ought to be some sort of inquiry into the events of the past few days.

The purpose of the rules of a stock exchange is to attract investors and company listings. Most investors, and most companies for that matter, are not attracted to a regime in which companies can be effectively taken over by a transfer of a strategic parcel of shares.

There is an argument that the national interest lies in making takeovers as easy as possible since that puts pressure on company managers to ensure their business performs. And in the long run, that pressure may do more for small investors than would a regime which would allow them to take part in partial takeovers but render such takeovers less likely. That is the reason the Stock Exchange and successive Governments have long resisted the preference of investors and companies for a more tightly regulated market.

The adoption of a takeovers code more in tune with that of Australia and other jurisdictions, though, could attract more equity investment in this country, from within and outside, and produce better corporate takeovers into the bargain. Effectively, the code will mean that ownership stakes will have to be at least 50 per cent, and it is hard to see that there is much wrong with that. It is a level of commitment that is to be welcomed. In any case, the fast and loose ways of the Stock Exchange cannot continue. If there was any lingering regret at the pending takeover regulation, the Montana raid has put an end to it. This case will long be cited as an indictment of a sharemarket that has run off the rails.