Skip Navigation.
Go to home page - Securities Commission New Zealand.
  • About
  • Publications
  • Exemptions
  • Notices
  • What's new?
  • International
  • Speeches
  • Information for investors
  • Contact us
  • Site map
  • Home
Print this page.

Report of the Securities Commission on Aspects of the Affairs of Max Resources Limited

6

Conduct of Max's directors in relation to transactions entered into by Max in 1996/1997

Change in the nature of Max's principal business in May 1997
 
6.1 Around November 1996 Max's directors decided to change the nature of the Company's business from the holding of interests in mining tenements to the processing of organic fertilizer. Minutes of a telephone conference meeting of the four Max directors on 27 November 1996 recorded that:
  1. Directors had been unable to complete acceptable negotiations to acquire Asian WRS plants;

  2. A WRS plant in Ohio, United States of America was available for purchase for US$700,000 but a non-refundable deposit of US$100,000 was required within the next week;

  3. Max had the opportunity to buy directly into the French WRS plant with an issue of options in Max to be made to Max's then director Jeff Verheggen and his father Verheggen Snr in consideration for their interest in WRS Europe 4 , but that A$460,000 needed to be lodged with AFA's bankers within the next week;

  4. Further short term borrowings or asset sales would be needed to finance these purchases.
 
6.2 On 8 May 1997 Max's directors obtained the required shareholder approval to change the Company's principal business from the holding of interests in mining tenements to the manufacture and distribution of organic fertilizer.

The purchase of the Ohio WRS Plant by Max
 
6.3 We have copies of correspondence indicating that in late 1996 WRS Pacific (Briggs) was negotiating, via Hampton Snow, with an American company, J G Turner Inc, for the purchase of a WRS plant in Ohio. It would appear from this correspondence that WRS Pacific decided not to proceed with the acquisition and that it was arranged that Max would purchase the Ohio plant instead.
 
6.4 The correspondence supporting this interpretation of events includes:
  1. A copy of a letter from a W S Cairns (a director of Hampton Snow) to Mr Trevor Lunt (then managing director of WRS Pacific), dated 19 November 1996, enclosing a copy of an executed agreement for the sale of the Ohio plant. This states that the agreement is to be held in escrow by Lunt.

  2. A copy of a joint letter from Briggs and Lunt to Cairns, dated 28 November 1996, instructing Cairns to write a letter (in the same form as a draft attached to the joint letter) to J G Turner Inc's New York lawyers, advising that Hampton Snow had decided not to proceed with the acquisition of the Ohio plant but understood that another party (Max) was immediately ready to proceed with the purchase.

  3. A copy of an agreement for sale and purchase, dated 3 December 1996, between Max and J G Turner Inc for the purchase of the Ohio plant by Max.

See Appendix B for a fuller account of the purchase of the Ohio plant.

 
6.5 A teleconference meeting of all of Max's directors was held on 12 December 1996. The minutes of this meeting record that the purchase of the Ohio plant had been secured by payment of a non-refundable deposit of US$100,000 with the balance of US$600,000 to be paid by 31 January 1997. The purchase agreement was acknowledged to be subject to shareholder approval, to be obtained by 17 January 1997. However, Langoulant advised the meeting that it was not feasible to hold a shareholders' meeting by that date. The teleconference meeting concluded "that shareholder approval...was not required as the Board took the view that the (plant) can be purchased as an investment (initially not for trading activities)." It was noted that "verbal advice from Lowndes Jordan [solicitors] had confirmed this position". Lowndes Jordan has said in submissions to us that they gave advice to Langoulant in relation to this transaction but deny giving advice of this nature.
 
6.6 As Briggs (a major shareholder in WRS Pacific) did not become a director of Max until 4 January 1998, there does not appear to have been a conflict of interest on Brigg's part at the time this transaction was arranged. Nor do we have evidence of any other of the directors having a conflict of interest in respect of this transaction. However it appears from the Company's records that significant remittances of funds, amounting to more than NZ$1.35 million, were made to the venture from late January 1997 to April 1997, indicating that Max may have been committed to the purchase of the Ohio plant before the shareholders had approved the change in the Company's principal business.

The French Venture

 
6.7 In 1996 WRS Pacific held an 87% interest in AFA, a French company engaged in a joint venture for the construction of a WRS plant at St Thois, France. WRS Pacific was owned by Briggs, and employees Lunt and Mr Robert Skidmore. Briggs had applied to be appointed a director of AFA on the basis of WRS Pacific's 87% interest.
 
6.8 It appears that, as part of the joint venture, WRS Pacific had assumed a number of financial obligations to a French company, CR2I, in connection with the construction of the French WRS plant. By mid 1996 the venture was in financial difficulty, with losses of approximately FF1.974 million. WRS Pacific was having difficulty meeting its funding obligations to the venture, thereby hindering CR2I's ability to complete the development of the plant. A cash injection was needed to sustain the venture. We understand that WRS Pacific approached Jeff Verheggen in this regard.
 
6.9 Against this background, it appears that in August 1996 an arrangement was made whereby AFA reduced the face value of its shares from FF100 to FF10. This left AFA with a share capital of around FF176,500. AFA agreed to increase its share capital by issuing 256,000 new shares (87% of the expanded capital) to WRS Europe, a company owned by the Verheggens, and a further 21,350 new shares to CR2I. It is evident, however, that the required actions by AFA were not completed and WRS Europe did not formally acquire an 87% interest in AFA.
 
6.10 WRS Europe agreed to purchase the shares for a total consideration of FF2.56 million. Verheggen Snr made an initial payment of FF600,000 and agreed to pay the balance (FF1.96 million) in instalments.
 
6.11 Around November 1996, arrangements were made for Max to acquire the Verheggens' interest in the French WRS plant by Max purchasing all their shares in WRS Europe. As consideration for the shares, Max agreed at a teleconference meeting of the four Max directors on 12 December 1996, to:
  1. Issue 20 million 31 July 1999 Max share options to Jeff Verheggen and Verheggen Snr;

  2. Inject FF1.96 million of long term loan funds into WRS Europe so that it could meet its financial obligations to the French venture; and

  3. Obtain a loan of FF13 million from a French bank over a period of 10 months at a rate of 6% p.a. interest and make that available to fund AFA's development of the French plant.

Jeff Verheggen has told us that the issue of Max options to himself and his father did not take place.

 
6.12 The minutes of the meeting held on 12 December 1996 recorded the interest of both Jeff Verheggen and Verheggen Snr in the French Venture. The minutes recorded:

It was noted that this transaction was a Material related party transaction and KPMG of Perth had been commissioned to prepare the required Appraisal Report. This report would ascertain whether the transaction was fair to all shareholders.
 
6.13 The minutes also recorded "that FF1,600,000 had been loaned to WRSEL [WRS Europe] to meet certain of its obligations on the basis that these funds will be refunded if Max did not proceed with the WRSEL transaction", and that "a further FF360,000 was required to be advanced to WRSEL by 16 December 1996 to meet its additional obligations" [to the company constructing the French plant, CR2I].
 
6.14 The directors of Max 5 resolved at the meeting "... to enter into a contract of sale with the Verheggens whereby Max acquires 100% of WRSEL in consideration for the issue of 20 million unlisted 31 July 1999 options and the provision of long term loan funds of FF1,960,000 to WRSEL." (The minutes do not record any conditions attaching to the acquisition. The FF1.96 million appears to be the sum of the two loan amounts referred to in the preceding paragraph.)
 
6.15 In mid-December 1996, Max's directors commissioned KPMG to prepare an independent appraisal report to put to the meeting of shareholders necessary to approve the purchase of WRS Europe and related transactions. However, we understand that the appraisal report was not formally released by KPMG to Max due to a dispute over non-payment of a fee owed by Max to KPMG.
 
6.16 It appears, from an unsigned copy of an agreement between Jeff Verheggen and a Jean- Claude Fritsch of CR2I (a document attached to McShane's first affidavit), that Max gave an undertaking (apparently signed by Jeff Verheggen on 27 March 1997) to raise FF13 million (A$2.827 million) from a French bank over a period of about 10 months to fund the development of the French WRS plant by CR2I. This obligation did not appear to have been agreed to by the directors of Max. (McShane said in his affidavit that he had not seen the 27 March 1997 document until November 1997.) In the same document Verheggen agreed, in order "...to meet the working capital requirement of the A.F.A. company.." to "procure the Max Resources company to pay the minimum sum of FF3 million."
 
6.17 Langoulant said in his affidavit evidence that this document was "a summary of many additional discussions and negotiations Jeff Verheggen had with officers of CR2I in the French Project with no conclusive binding effect on Max." In a submission to us Langoulant said that this was not a contractual document to which Max was a party and did not place any funding commitments upon Max. However we note from files in our possession a copy of the first page of a facsimile message of 24 November 1997, addressed to "Tom and Owen", apparently from Langoulant, and sent in response to a message from McShane to Langoulant dated 21 November 1997. McShane had expressed his concerns about funds being sent by Max to France. The author of the 24 November message said "You seem to forget that Max has a contract to buy the French project, subject to shareholder approval, which means we have a [legal] obligation, not to mention a financial reason, for protecting the French project."
 
6.18 The French Venture involved transactions with or on behalf of a related party of Max. In terms of the Listing Rules of the NZSE (Rule 9.2.1) an issuer should not enter into a material transaction with a related party unless the transaction had been approved by an ordinary resolution of the company. An Appraisal Report by an independent expert has to be provided to members of the issuer at the time they vote on the resolution.
 
6.19 Max's directors were well aware of this requirement. It was referred to both in an appendix to the Information Memorandum provided to shareholders of Max for their Extraordinary General Meeting on 8 May 1997 (held to approve the change in the Company's principal business), in the 1997 Annual Report, and in the announcement to the NZSE in December 1996.
 
6.20 In the Information Memorandum it was stated, under the heading "Potential Purchase of Organic Fertiliser Interests St Thois, France" that Max had "agreed to purchase" 100% of the issued capital of WRS Europe. The text referred to the related party nature of the transaction and of the need for an Appraisal Report. It noted that Max was encountering difficulties in completing due diligence and that KPMG could not complete its Appraisal Report. The Memorandum said that it was expected that the meeting of shareholders to approve the transaction would be held in June 1997.
 
6.21 The 1997 Annual Report referred at page 6 to the St Thois plant. Again reference was made to the need for shareholder approval but no reference was made as to when this would be sought.
 
6.22 To date Max's involvement with the French Venture has not been approved by the Company's shareholders. This would appear to be a breach of the Listing Rules.
 
6.23 The NZSE Listing Rules require any transaction needing shareholder approval to be made conditional upon obtaining such approval. Moreover, the Listing Rules state that the transaction shall not be completed until the approval is obtained and, if the approval is not obtained, the public issuer shall terminate its obligations. In this case, Max's shareholders were deprived of the opportunity to vote on the French transaction with the benefit of an independent appraisal report which would have stated, among other things, whether the terms and conditions of the proposed transaction were fair to the remaining shareholders.
 
6.24 Despite not having obtained shareholder approval, and the transaction with the Verheggens not having been completed, Max forwarded around NZ$1.18 million to the French venture in the form of loans to CR2I on behalf of WRS Europe. In December 1996 Max sent approximately NZ$500,000 to CR2I. Further sums were advanced to the French venture in June 1997 (to CR2I via WRS Europe) and in October 1997, when A$240,000 from the sale of Robregal's interest in Intrepid was forwarded to CR2I.
 
6.25 Since agreeing to acquire WRS Europe, Max has had difficulty in meeting the financial requirements of the venture.
 
6.26 At the date of this report, the statutory managers had entered into an agreement to sell Max's fertiliser assets (including the remaining interest in AFA). On the price to be paid by the purchasers, Max's investment of around NZ$1.2 million will not be fully recovered.

Conclusions relating to the French Venture
 
6.27 The Commission considers that there are reasons to conclude that one or more of the directors did not show sufficient regard for:
  1. their duties to Max; and

  2. their obligation to the NZSE to use their best endeavours to procure Max's compliance with the Listing Rules; and

  3. the interests of Max's shareholders;

with respect to these transactions involving the French venture.

 

4 Our information suggests that in 1996 WRS Pacific, a company owned by current Max director Briggs, and employees Skidmore and Lunt, had an 87% interest in AFA. This interest involved financial commitments to the venture that WRS Pacific could not meet. Subsequently AFA resolved to increase its issued capital by issuing new shares to WRS Europe, Jeff Verheggen and Verheggen Snr's company, which would result in WRS Europe having an 87% interest in AFA. (We understand this issue of shares did not take place.) Max purchased WRS Pacific by the issue of 5 million Max shares to companies associated with Briggs, and agreed to acquire WRS Europe in exchange for taking over WRS Europe's funding commitments to the French venture and the issue of 20 million options in Max shares to the Verheggens. Return

5 The minutes of the meeting noted the interest of Jeff Verheggen and Verheggen Snr in the matter. There is no indication in the minutes that any directors of the Company did not participate in discussion about, or vote on, the resolution approving these terms. However Langoulant and Jeff Verheggen have told us that Jeff Verheggen did not vote on the resolution. Return