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Report on Inquiry into Trading in the Shares of McCollam Printers Limited

Introduction

The Securities Commission has undertaken an inquiry into trading in the shares of McCollam Printers Limited (MPL), in particular, in the period preceding the announcement of the takeover offer by Blue Star Group Limited (Blue Star) on 16 May 1997. The inquiry has been conducted under sections 10 and 18 of the Securities Act 1978 (the Act). Initial terms of reference for the inquiry were agreed in December 1997. These were subsequently amended March 1998, primarily to include questions arising under Part II of the Securities Amendment Act 1988 (the Amendment Act). A copy of the revised terms of reference is attached at Appendix A.
This report contains the findings and comments of the Commission pursuant to the revised terms of reference.
The inquiry was conducted by a quorum of Members of the Commission comprising Euan Abernethy (Chairman), Ian Farrant, Joanna Perry and Michael Webb. After completion of its work the Commission circulated relevant parts of a draft report to affected parties in September 1998. The Commission has carefully considered all representations made to it.
The Commission has also provided assistance to the United States Securities and Exchange Commission (SEC). This was done under sections 10(ca) and 18A of the Act.
The trading that took place in MPL before the announcement of the takeover by Blue Star gives rise to questions under Parts I and II of the Amendment Act. The trading also gives rise to questions about the operation of the present law and market practice more generally.

Acquisition of McCollam Printers Limited by Blue Star Group Limited

MPL is a printing company. It was listed on the New Zealand Stock Exchange (NZSE) in December 1994. The major shareholders in the company were members of the McCollam family and persons associated with them(the McCollam interests).
Blue Star is a wholly owned subsidiary of US Office Products Company (USOP). Its New Zealand directors at the time of the take over were Eric Watson (chief executive officer), Maurice Kidd (chief financial officer) and David Brown. Its American directors were Jonathan Ledecky, John Quelch and Donald Platt (all of USOP). Blue Star has been USOP's vehicle (as a majority or wholly owned subsidiary) for a large number of acquisitions and takeovers in Australasia in the past few years. These have included U-Bix Business Machines Limited, Whitcoulls Group Limited, Wang New Zealand Limited (in New Zealand) and a division of Ausdoc Group Limited (in Australia). The shares of Blue Star have never been listed on the NZSE.
USOP is incorporated in Delaware in the United States with its principal executive offices located in Washington DC. The company is a supplier of a broad range of office and educational products and business services to corporate, commercial, educational and industrial customers. It operates in the United States, as well as in Canada, the United Kingdom, Australia and New Zealand. Since it started in 1994 USOP has completed more than 175 acquisitions and has annualised sales of approximately US$3.4 billion (as at 1 July 1997). USOP stock is traded on the NASDAQ National Market in the United States.
At 5:05 pm on Friday 16 May 1997 the NZSE released an announcement to the market that Blue Star Investments Limited (a wholly owned subsidiary of Blue Star) had made a takeover offer for shares in MPL under the Companies Amendment Act 1963. The offer was priced at $2.75 per MPL share, payable in cash. It was conditional on the McCollam interests, who held approximately 38% of the company, agreeing to sell their MPL shares on separate terms satisfactory to Blue Star.
On 4 June 1997 the separate agreement between the McCollam interests and Blue Star was signed. The consideration for this separate transaction was the receipt by the McCollam interests of shares in USOP (the United States parent of Blue Star). The value of USOP shares taken up by the McCollam interests as at the time of settlement equated to $3 for each MPL share (this was against $2.75 a share offered to the other shareholders of MPL). The next day the offer was declared to be unconditional. The takeover was then completed followed by the compulsory acquisition of the remaining shares which had not been acquired in the general offer. The company (at this point wholly owned by Blue Star) was de-listed from NZSE on 22 August 1997.

Investigations

As part of its ongoing surveillance work, the Commission began an investigation into trading in the shares of MPL in the period ahead of the announcement of the takeover on 16 May 1997. Arising from its preliminary investigations the Commission ascertained that a parcel of 398,000 MPL shares had been traded approximately one hour before the takeover announcement. These shares had been acquired by a company called Seahunter Investments Limited (Seahunter) at $2.36 a share. The Commission was informed by the broker that Seahunter was a nominee company administered by Richard Johnston of Brown Woolley Graham, chartered accountants in Auckland. It was also informed (by Richard Johnston) that the shares had been acquired "at the instructions of, and on behalf of, private interests of Mr Eric Watson."
In the context of continuing inquiries it was decided to draw the SEC's attention to the matter given that Blue Star was wholly owned by USOP a company incorporated and traded in the United States and as such under the jurisdiction of the SEC. The SEC then made a request for assistance to the Commission to obtain information with a view to determining whether the trading may have violated United States securities law. This request was considered under section 18A of the Act and it was decided to recommend to the Minister of Commerce that the request be complied with. The Minister accepted this recommendation. The Commission also decided to undertake its own inquiry and it was proposed that the two inquiries should be run concurrently. This was towards the end of 1997.
In the following months the Commission obtained further information from brokers and from the various parties involved in the takeover. Investigations were also undertaken overseas. Hearings were then held on 11 and 12 May 1998 when evidence was received from Jonathan Hislop, Steven McCollam and Scott Perkins (representing the McCollam interests). Evidence was also then received from Richard Johnston, William Gibson, Maurice Kidd and Eric Watson. Additional evidence has also been obtained subsequently as a result of matters arising in the course of the hearings. A supplementary recommendation under section 18A of the Act was made to the Minister in June 1998 and this further recommendation was accepted.
The Commission has responded to High Court proceedings brought by Richard Johnston and Craig Joynt to prevent information being sent by the Commission to the SEC. These proceedings were determined in favour of the Commission. Judgment in these proceedings was delivered by Justice Heron on 20 July 1998.