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Report on Trading in the Shares of Fletcher Challenge Limited in December 1999

Definitions

"Amendment Act": Securities Amendment Act 1988

"FCL": Fletcher Challenge Limited

"JBW": J B Were & Son NZ Limited

"NZSE": New Zealand Stock Exchange

"the Act": Securities Act 1978

"the Commission": The New Zealand Securities Commission

Introduction
2.1    The Commission has undertaken an inquiry into trading in the shares of FCL in the month of December 1999. The inquiry has been conducted under sections 10, 18 and 19 of the Act.
2.2    A quorum of Members of the Commission comprising Euan Abernethy (Chairman), Falcon Clouston, Ian Farrant and Lloyd Kavanagh was responsible for the conduct of the inquiry.
2.3    The Commission decided to undertake the inquiry following release of statements on 23 December 1999: (a) by Mr Paul Baines, a director of FCL speaking on behalf of the Board, accepting the resignation of Chairman Kerry Hoggard from the Board; and (b) by Mr Hoggard that his decision to resign arose out of the purchase of FCL shares following a FCL Board meeting on 14 December and prior to a public announcement by FCL on the morning of 16 December about important decisions taken at that meeting. Copies of both statements are attached.
2.4    During the course of the inquiry the Commission received assistance from the NZSE, members of the Board and executive staff of FCL, employees of JBW and Mr Hoggard. All of these persons have cooperated fully and the Commission is grateful for this.
2.5    Although the inquiry considered the trading in the shares of FCL throughout the month of December, the Commission only wishes to comment upon the trading on and around 15 December 1999. No other trading appeared to call for comment.
2.6    The Commission has also reviewed the procedures of broking firms in New Zealand for effecting transactions in the listed securities of a company on behalf of persons known to be insiders of the company. We wrote to all members of the NZSE on this matter. The Commission is grateful to the members of the NZSE who provided information.
2.7    Before settling the terms of this report the Commission prepared confidential consultative drafts which it circulated to the affected parties and invited comment. The Commission has carefully considered all comments made to it.

Facts

3.1 On 13 July 1999 FCL announced certain decisions about the strategic direction of the company. The announcement affected all Divisions. On 14 December 1999 the Board of FCL made additional decisions on the future structure of the Company. These related in particular to dismantling the Company's letter stock structure. The additional decisions were conditional and the company made no public announcement about them at the time.

3.2 At approximately 2:00 pm on 15 December 1999 Mr Hoggard placed with JBW an order to purchase the quantities of shares listed below. JBW completed the order that afternoon at the prices as listed.

Stock Number Average Price Total Price

Fletcher Building 60,000 shares $2.36 $141,600

Fletcher Energy 60,000 shares $4.28 $256,909.57

Fletcher Forests 150,000 shares $0.69 $102,800

Fletcher Paper 120,000 shares $1.11 $133,200

It should be noted that the above prices exclude brokerage costs.

3.3 On 15 December 1999, following the trade, Mr Hoggard sent a facsimile to the then FCL Corporate Secretary, Mr Gary Key, advising of the transaction. The facsimile was dated 15 November 1999. We accept that this was a typographical error and that the facsimile was actually transmitted on 15 December 1999.

3.4 In the evening of 15 December 1999 Mr Hoggard was contacted at home by a reporter from the New Zealand Herald. The reporter asked him about progress with a "Plan B" at FCL. Many commentators believed there was a restructuring "Plan B" that FCL would adopt, following the failure to bring into effect a plan to merge Fletcher Challenge Paper with Fletcher Challenge Canada (announced on 13 July 1999). Mr Hoggard told the reporter that an announcement would be made the following morning. Mr Hoggard also said that the announcement "was not necessarily on Plan B - it was wider than that". This information was subsequently published in the New Zealand Herald on the morning of 16 December 1999.

3.5 On the morning of 16 December 1999 FCL publicly announced that the Board of Directors had resolved "to dismantle the Group's targeted share structure and establish separate entities". The Company also announced that the Group would record its best first-half earnings result before tax, interest and unusual items since FCL's share split in 1996. The result for the six-month period to 31 December 1999 was forecast to be more than two and a half times that recorded in the previous six months to June 1999. Mr Hoggard, speaking in his capacity as Chairman of the Company, said that the Board's purpose in making the announcement was "to provide the equity market with clarity as to the future capital structure of the Company and, along with improved profitability, give shareholders confidence for the future."

3.6 Mr Hoggard tendered his resignation as FCL Chairman and Director on 23 December and this was accepted by the Board. In his resignation statement (copy attached) Mr Hoggard, in reference to the share purchase referred to in paragraph 3.2, said:

"The intent of the purchase of these shares was to demonstrate to the market my personal financial commitment to the Company to carry through the critical restructuring that was the subject of the announcement."

Subsequently Mr Hoggard informed the Commission that he purchased the shares in FCL because:

"I wanted the Board and more importantly the senior management to know that I had made a significant financial commitment to see through this procedure."

Mr Hoggard also informed the Commission that he had no intention of selling the shares in the short term.

3.7 Mr Hoggard observed in his resignation statement that as a result of the transactions he had "technically breached the Company's share trading regulations", that is, FCL's Securities Trading Code of Conduct applicable to Directors and Employees.

3.8 It was not clear from the evidence whether Mr Hoggard was conscious that his conduct breached those rules at the time he placed the order with JBW:

Mr Hoggard advised the Commission that he was aware of the Code and the general nature of its contents. He added that he had not, however, had cause to examine those provisions for some years. He stated that he was preoccupied with other matters (relating to FCL's affairs and to another company's (of which he is a director) plan to relocate to Australia). He added that he had little time to reflect on his personal position and did not turn his mind to the application of the Code to the transaction that he undertook. He thus failed to appreciate that the purchase transaction, that he initiated by placing the order on 15 December 1999, was one which was prohibited by the Code and the Amendment Act.
Mr Gary Key informed the Commission that, on either 13 or 15 December 1999, prior to the transaction, Mr Hoggard told Mr Key that he intended to buy FCL shares. Mr Key stated that he advised Mr Hoggard not to buy shares until after the announcement. Mr Key noted this on the foot of Mr Hoggard's facsimile of 15 December 1999 (referred to in paragraph 3.3) and reiterated it in a file note. Having been advised by the Commission of Mr Key's account of the matter, Mr Hoggard has responded by informing the Commission that he has no recollection whatsoever of such advice being given to him by Mr Key, and he has further explained that had advice or comment such as described by Mr Key been made to him before he placed the share purchase order, he would undoubtedly have paused to reconsider the appropriateness of purchasing shares in FCL at that time.

3.9 The Minutes of an FCL Board meeting on 22 December 1999 record that Mr Hoggard told the Board of FCL that he did not remember receiving Mr Key's advice. FCL informed us that Mr Hoggard subsequently told the Board at that meeting that if Mr Key said that he had given it, he did not dispute that was the case. Mr Hoggard accepted that he subsequently commented that he would not take issue with Mr Key's account of their conversation but said that his remark was a pragmatic response made at a time when he considered that there was nothing to be gained from taking issue on the matter as by then he had realised the mistake he himself had made by his own inadvertence. Mr Hoggard does not however accept the accuracy of Mr Key's account of their conversation.

3.10 The Commission acknowledges Mr Hoggard's explanation as to his motivation for placing the order. The Commission has decided not to make a finding as to whether Mr Hoggard was conscious at the time that he should not trade prior to the announcement. However we are surprised that Mr Hoggard was not more familiar with his obligations under the Code and the law. We would have thought that a director of a major listed company would ensure he or she was aware of the relevant law.

3.11 As noted in paragraph 3.3 Mr Hoggard informed the company of his transaction on the day on which it was effected. In addition Mr Hoggard informed us that when it was suggested to him on 20 December 1999 that the transaction was contrary to the insider trading prohibition, he acted immediately by sending a second notice of the share purchase, addressed to all directors, in order that the matter could be discussed at the Board meeting scheduled for 22 December 1999. He subsequently tendered his resignation.

3.12 Mr Hoggard said in his resignation statement that he had contacted his broker and ascertained that the possible loss to those shareholders who sold to him was $58,790 being the difference in the share price between what Mr Hoggard paid for his shares on 15 December and the price on 17 December, the day following the announcement. Mr Hoggard placed that amount in the trust account of his solicitors Rudd Watts & Stone for the purpose of enabling them in consultation with the broker "to reimburse the sellers concerned".

3.13 The Board of FCL had previously insisted that Mr Hoggard undertake to provide full compensation to sellers, in a letter to Mr Hoggard dated 22 December 1999.

3.14 Mr Hoggard's share purchase was reported by FCL's Compliance Officer to the Ontario Securities Commission on 24 December as part of FCL's routine report detailing movements in insiders' shareholdings for the month ended 31 December 1999.

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