
	Advanced Search

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

Results of Investigations

The report now records the results of the investigations that the Commission has undertaken.

Takeover Discussions

The discussions between Blue Star and the McCollam interests began in mid-November 1996. These discussions were initiated by Blue Star. Eric Watson, as chief executive officer, had the primary responsibility for negotiating the proposed acquisition and led the discussions on behalf of Blue Star assisted by Maurice Kidd (chief financial officer of Blue Star). There was also regular liaison between Blue Star and USOP in the United States. The main persons involved on behalf of USOP were Jonathan Ledecky (chairman and chief executive officer), Donald Platt (chief financial officer) and Mark Director (chief administrative officer and general counsel). Steven McCollam (managing director of MPL) mainly represented the McCollam interests assisted by Scott Perkins of FR Partners Limited (FR).
A draft letter of intent for the acquisition of MPL was sent by Blue Star to the McCollam interests on 22 November 1996. This contemplated an acquisition that would qualify as a pooling of interests for the purposes of United States accounting practice. (This is a method of company acquisition that does not result in the creation of accounting goodwill and, the Commission understands, is widely used in the United States.) The letter included a confidentiality provision which prevented the disclosure of the proposed acquisition to any third party pending its completion. Thereafter there were ongoing discussions by and between the parties about the proposed acquisition, in particular, the mechanics of implementing a pooling of interests.
These discussions were continuing in March 1997, however, it appeared that the acquisition might not proceed on the basis of a pooling of interests. Eric Watson reported to Jonathan Ledecky (of USOP) on 19 March 1997 in the following terms:
Further to our conversation and approval to proceed with the purchase of the New Zealand public company McCollam Printers Limited on the basis of a share deal we have today confirmed in a meeting with the major shareholders an offer of $3.36 per share. This deal will be a share deal only i.e. no cash, however for a variety of reasons it will not be a pooling and we will initially own somewhere between 50% and 100% of the company ...
Given that McCollam is a publicly listed company and we need to make a written offer to all of the shareholders it will be at least 6-8 weeks before we can close the deal.
Arising from this, Chapman Tripp Sheffield Young were instructed to prepare draft offer documents on behalf of Blue Star. These were sent to USOP's lawyers in the United States for comment on 26 March 1997.
The acquisition then appears to have been put on hold. Eric Watson's reaction to this development is reflected in a further communication from him to Jonathan Ledecky on 1 April 1997, as follows:
Maurice [Kidd] has spoken to me, following your conversation with him, and I am extremely disappointed with what I heard.
I clearly understood that you and I had a verbal agreement that we could proceed with the McCollams proposal and on the basis of that we now have an understanding with the principal shareholders of McCollams. In fact I remember very clearly you saying; please advise me of any announcement before you go public ...
I await your written approval to proceed.
The prospect of an acquisition then appears to have been resuscitated towards the end of April 1997. This is apparent in an e-mail sent by Eric Watson to Jonathan Ledecky on 1 May 1997, as follows:
We have finally today agreed a deal in principle with McCollam at NZ$3.00 per share, on a share for share basis, and NZ$2.75 if cash.
Following our last discussion we offered NZ$2.90 for shares and NZ$2.60 for cash while they argued for NZ$3.20 and NZ$3.00 respectively. This is good news as it is a very good company with good management which will enrich the group significantly.
Now that we have an agreement with the major shareholder and because McCollam is a listed company the process is to now make a written offer to all shareholders of either NZ$2.75 for cash or NZ$3.00 for shares, for each of their shares. This offer is currently being drafted by solicitors and will go to the directors of McCollam very early next week...
We have a firm agreement with the McCollam family, who hold 45% of the company, that they will accept shares.
Will, obviously, keep you informed.
Jonathan Ledecky responded to Eric Watson the following day saying that he (Eric Watson) was approved to make an offer at $2.75 cash or $3.00 in USOP stock.
Chapman Tripp Sheffield Young then prepared a revised draft of the offer documents reflecting the latest arrangements. These were faxed to USOP by Maurice Kidd on 12 May 1997. Maurice Kidd reiterated in his covering note that Blue Star was to make an offer to all MPL shareholders for $2.75 cash, or $3.00 if settled in USOP shares. Maurice Kidd confirmed that the McCollam interests had indicated that they would accept USOP shares for their MPL shareholding. The arrangements as they stood at that time were also reflected in a draft press release agreed between Scott Perkins of FR (representing the McCollam interests) and Blue Star on 13 May 1997, in particular, it stated that the McCollam interests " have indicated their intention to accept the offer and their preference to take up USOP shares in exchange for their holding."
On 15 May 1997, the terms of the acquisition were altered. On that day the executive committee of the board of directors of USOP formally approved the acquisition of MPL based on a cash offer of $2.75 to the minority shareholders of MPL, and based on a price of not more than $3 a share for the MPL shares of the McCollam interests (payable in USOP stock). On the same day a draft agreement was prepared by Chapman Tripp Sheffield Young (on behalf of Blue Star) relating to the sale of the MPL shares of the McCollam interests to Blue Star.
On 16 May 1997 a meeting was held between the McCollam interests and Blue Star to finally agree the arrangements. These were formally notified to MPL at 4.55 pm that day. The NZSE was also informed and at 5.05 pm an announcement was released to the market.(This was a different announcement to the one mentioned in paragraph 21which was not released. The announcement that was released did not make reference to the intentions of the McCollam interests concerning the disposition of their shares.)
Following further discussions, a separate agreement between the McCollam interests and Blue Star was subsequently signed on 4 June 1997. In the report to shareholders (dated 30 May 1997) undertaken by independent directors Brian Allison and Andrew Harmos (chairman and non-executive director of MPL) the following statements appeared:
It is fundamental to this matter that the principal shareholders [the McCollam interests] have had independent discussions with Blue Star on the sale of their substantial interests in the company. Realistically it appears probable that the Blue Star offer would not have been effected if Blue Star had not first obtained a reasonable expectation of acquiring those shares. This, of course, may have had the effect of eliminating the possibility of attracting other potential offers for the company's shares.
The independent directors understand that Blue Star has reached substantial agreement to acquire the principal interests on the basis of an offer comprising scrip in Blue Star's USA domiciled parent company (US Office Products). We understand that the comparable value of the scrip offer is NZ$3.00 per share.
The report concluded that the cash offer of $2.75 was fair.
The foregoing information is largely based on documents provided by the parties to the inquiry. This documentary evidence is qualified by the oral evidence of witnesses, in particular, as to the status of the negotiations between the McCollam interests and Blue Star. The oral evidence of the witnesses is considered later in the report at paragraph 56.

Share Trading
Throughout the period that Eric Watson was negotiating on behalf of Blue Star and USOP he was acquiring an interest in MPL shares either for his own personal benefit or for the personal benefit of associates. The report has previously mentioned the share trade that took place approximately one hour before the announcement of the takeover on 16 May 1997. This was the purchase by Eric Watson (in the name of Seahunter)of 398,000 MPL shares which was identified by the Commission at the preliminary stages of the inquiry. The evidence now available to the Commission indicates that this trade was one of many that were associated with Eric Watson and which took place in the period preceding the announcement of the takeover. The total picture of trading can be found at Appendix B attached to this report. It shows that:
1. a total of 2,403,800 MPL shares was purchased in the period 23 October 1996 to the day of the announcement of the takeover with significant purchases occurring on 27 March 1997, 28 April 1997 and 16 May 1997;
2. some selling occurred in the period preceding the announcement totalling 40,800 MPL shares;
3. a total of 2,363,000 MPL shares was sold following the announcement, of which 948,000 were sold on the market and 1,415,000 into the takeover;
4. three brokers were used for the trading, namely, Ord Minnett Securities -NZ- Limited, J B Were & Son (NZ) Limited and Cavill White Securities Limited;
5. the trading was variously booked to Craig Joynt, Richard Johnston, Kitchener Nominees Limited (Kitchener) and Seahunter in the accounts of Ord Minnett and J B Were;
6. the trading was booked to Deutsche Morgan Grenfell Australia Securities Limited in the accounts of Cavill White;
7. a cash gain of $680,705 resulted from the total trading.
The cash gain mentioned in sub-paragraph (g) is subject to the evidence of Eric Watson and Maurice Kidd that the gain in respect of the re-sale of the 398,000 MPL shares was later adjusted in favour of Blue Star. This is discussed more fully in paragraph 40 of the report.
Eric Watson has provided an explanation of the trading to the Commission. He said that :
1. Richard Johnston and Craig Joynt are close associates of his and that the three of them have previously participated in a number of different share acquisition arrangements together. Their relationship went back more than a decade and they trusted each other.
2. Sometime before formal or informal talks with the McCollam interests took place, he (Eric Watson) had the idea to buy shares in MPL on the basis that he simply liked the look of the company.
3. He had had discussions with Richard Johnston and Craig Joynt about his intention to buy MPL shares and they had indicated their interest in participating.
4. It was agreed between the three of them that the first 4.99% of the MPL shares acquired would be for his own effective beneficial interests and the balance would be held for Richard Johnston and Craig Joynt or their interests in the proportions that they agreed.
In relation to this explanation, Eric Watson provided a schedule of transactions to the Commission. A copy of this is attached at Appendix C. It shows the accumulation of shares by or on behalf of Eric Watson in the period 23 October 1996 through to 16 May 1997. It also shows what are described as transfers of MPL shares from Eric Watson to Richard Johnston and Craig Joynt over this period. It shows five such transfers of shares, as follows:
1. of 254,306 MPL shares on 25 March 1997 half of which went to Richard Johnston and the other half to Craig Joynt;
2. of 500,000 MPL shares on 28 April 1997, 20,000 MPL shares on 2 May 1997 and 4,600 MPL shares on 9 May 1997, all of which were disposed of in the same way;
3. of 398,000 MPL shares on 16 May 1997, 110,547 of which went to Richard Johnston and the balance of 287,453 to Craig Joynt.
This schedule had not been compiled at the time Eric Watson appeared to give evidence before the Commission on 12 May 1998. It was only compiled after his appearance and as the result of a request from Commission Members to provide a statement distinguishing his interests in the MPL shares from those of Richard Johnston and Craig Joynt. The schedule was provided to the Commission on 29 May 1998. Eric Watson has informed the Commission that Richard Johnston had responsibility for keeping an eye on his (Eric Watson's) shareholding position to ensure that it did not exceed 5% and thereby trigger the obligation to give a substantial security holder notice. He says that this would no doubt have meant that some of the shares which had been earlier allocated to him would have had to be reallocated to Richard Johnston and Craig Joynt. He went on to say, that in his view provided the three of them did not cumulatively exceed 15% then this was quite in order and within the regulatory regime.
Eric Watson in his schedule attributes a date for the transfer-on of shares on each occasion to immediately ahead of the acquisition of additional shares, thereby showing his total shareholding as remaining at below 5%. No underlying documents have been provided to the Commission evidencing any settlement between Eric Watson and Richard Johnston or Craig Joynt in respect of the MPL shares the subject of the five transfers. (Further comment on this can be found at paragraph 41 of the report.)
Richard Johnston and Craig Joynt
Richard Johnston is a partner in the Auckland chartered accounting firm of Brown Woolley Graham. He informed the Commission that he was a good friend of Eric Watson and had acted as his financial adviser and accountant since 1987. He said that he acted in conjunction with Eric Watson in making investments. Craig Joynt is an Auckland businessman who is a brother-in-law of Richard Johnston. Richard Johnston informed the Commission that he acted as an accountant for Craig Joynt as well.
Richard Johnston described the shares Eric Watson had purchased in MPL as being like a joint venture between the three of them (Eric Watson, Craig Joynt and himself) the ownership of which was still to be reconciled. He went on to say that MPL was a pot pourri of the three. Richard Johnston during his evidence did not refer to the arrangement that Eric Watson said was agreed, namely, that he and Craig Joynt would only become entitled to MPL shares once Eric Watson had first accumulated a 4.99% shareholding (see paragraph 27 (d)). Richard Johnston gave his oral evidence to the Commission on 11 May 1998. He subsequently informed the Commission by letter that he agreed with the description of the investment arrangements that had been provided by Eric Watson (as set out in paragraph 27). It is also apparent from the court proceedings that Craig Joynt agrees with Eric Watson's account.
Brokers
Three brokers were used in the trading of the MPL shares. The bulk of the trading was conducted through Ord Minnett and J B Were with one transaction done through Cavill White. Apart from the Cavill White transaction, the trades were recorded in the books of the brokers in the names of Craig Joynt (trading mainly in the latter part of 1996), Richard Johnston, Kitchener and Seahunter. The names so recorded for each transaction are set out in the second column of Appendix B.
In the early stages of the inquiry the Commission asked Eric Watson who had instructed the brokers in relation to trading in 1997. His response was that this had primarily been undertaken by Richard Johnston and William Gibson of Cullen Investments Limited (Cullen). J B Were informed the Commission that they had been instructed by Eric Watson in relation to the four Kitchener trades done in February 1997(totalling 195,000 shares), also the Kitchener trade done on 10 June 1997 (for the sale of 398,000 shares). Ord Minnett informed the Commission that Eric Watson had instructed them in relation to the Seahunter trade done on 27 March 1997 (for 800,000 shares). In the course of his evidence Eric Watson said that some of the earlier information which he had provided to the Commission may have been wrong. He stated that because of the size of his investments and his business commitments he would have little specific recall of individual transactions. He accepted that he may have played a greater role in relation to the giving of instructions to brokers. He also stated that he had authority as agent to instruct brokers on behalf of Richard Johnston and Craig Joynt and that this arose from the original commitment between the three of them to buy the shares in MPL.
The Commission made enquiries about the share trading accounts held with Ord Minnett and J B Were. The information provided by Ord Minnett showed that:
1. Eric Watson's account could be operated also by Craig Joynt and Kitchener (Richard Johnston),
2. Richard Johnston was designated as an authorised agent for Eric Watson,
3. Eric Watson had authority to operate Craig Joynt's account and give instructions on that account,
4. The address for Craig Joynt's account was given as c/- Richard Johnston at Brown Woolley Graham.
The information provided by J B Were showed that Eric Watson had authority to trade on Richard Johnston's account.
All the shares purchased through Ord Minnett were held in the registered name of Oceegee Nominees Limited which is the nominee company of Ord Minnett. All the shares purchased through J B Were were held in the name of Portfolio Custodian Limited which is the nominee company of J B Were. The ownership position appears to be that the nominee companies held for Craig Joynt, Richard Johnston, Kitchener and Seahunter who, in turn, held for Eric Watson (whether or not for the first 4.99% of MPL acquired), Richard Johnston and Craig Joynt.
Kitchener Nominees Limited
Kitchener is a nominee company of Brown Woolley Graham which is principally used as a vehicle to enable clients of that firm to secure better interest rates on their investments. The Commission has been informed by Brown Woolley Graham that if the name Kitchener had been used for the purchase of any shares then it would be used only as a vehicle on behalf of the beneficial owners. It would not hold any share ownership in its own right. No records have been provided to the Commission concerning the underlying ownership of the MPL shares held by Kitchener. The Commission has been informed that no such records have been kept.
Seahunter Investments Limited
Seahunter is not a New Zealand company. Its registered office is at TrustNet Chambers, P O Box 3444, Road Town, Tortola, British Virgin Islands although it appears to operate out of Hong Kong (Unit 1204A, 12/F, Peregrine Tower, Lippo Centre). Its director is Head Smart Management Limited and its shares are bearer shares. Three of the largest trades in MPL were booked in the name of Seahunter. These were the purchases on 27 March 1997 (800,000 shares), 28 April 1997 (500,000 shares) and on 16 May 1997 (398,000 shares) accounting for some 70% of the total shares bought in the period preceding the announcement of the takeover, accounting also for some 7.16% of the total issued share capital of MPL. On the evidence available to the Commission, Seahunter appears to:
1. be owned or controlled by Eric Watson and Richard Johnston,
2. be used as a vehicle for the investments of Eric Watson, Richard Johnston and Craig Joynt,
3. be administered by Richard Johnston and William Gibson of Cullen,
4. operate bank accounts held with J Henry Schroder Bank AG in Switzerland,
5. have been the recipient of the proceeds of re-sale of at least 1,300,000 MPL shares.
Share Trade on 28 April 1997
A parcel of 500,000 MPL shares was purchased in the name of Seahunter on 28 April 1997. This was done through Cavill White in Auckland. On making enquiries with Cavill White the Commission was informed that the instructions for this trade had not been sourced from within New Zealand but had come from Deutsche Morgan Grenfell in London. On making further enquiries into the matter (by enlisting the assistance of the Financial Services Authority in London) the Commission established that Deutsche Morgan Grenfell had been instructed by Ian Cornes of J Henry Schroder Bank AG in Geneva. The Commission was informed by Eric Watson that Ian Cornes had originally been instructed by William Gibson in New Zealand.
Share Trade on 16 May 1997
Eric Watson has explained the circumstances of his purchase of the 398,000 MPL shares approximately one hour ahead of the announcement of the takeover offer by Blue Star. He said that at approximately 2.30 pm that day he received an unsolicited call from Neil Ingram at J B Were who was looking to sell 398,000 MPL shares on behalf of a client. He did not know the identity of the vendor. He says he wanted to be sure that there was no legal problem in his buying the shares so he contacted John Strowger of Chapman Tripp who was representing Blue Star on the acquisition. Based on the advice received, he informed the Commission, he made the acquisition. He says he did so with the intention that the shares be sold through to Blue Star without him taking any profit which he says is what happened in the course of the takeover. Eric Watson believed he behaved prudently by taking legal advice at the time.
The Commission has obtained a statement from John Strowger about the approach made by Eric Watson. He stated as follows:
1. Eric Watson contacted him by telephone at around 3.15 pm.
2. He had asked Eric Watson whether he held any operational or other commercial information about MPL which could be classified as inside information. Eric Watson had said that he did not.
3. His view was that whilst Eric Watson knew that a takeover bid by Blue Star for MPL was probable and imminent, this was not information derived by reason of insider status (neither Blue Star nor Eric Watson being insiders). On that basis, the insider trading provisions of the legislation would not apply. Whilst bidding intentions were plainly price sensitive, this was information specific to the bidder rather than originating from the target.
4. In tendering the advice to Eric Watson, he (John Strowger)had also had regard to the status of the proposed transaction with the McCollam interests. While there was an expectation that a satisfactory transaction would ultimately be concluded, legally there was still a considerable distance from concluding a deal in principle, and certainly negotiation had not even commenced on some of the important details. Indeed, he had later that day advised Blue Star of the risks of launching the bid without having progressed matters further with the family, but a commercial decision was made to proceed on the basis of the condition in the offer document.
5. That he did not keep a file note but is confident that his recollection is accurate.
Eric Watson stated in evidence that the 398,000 MPL shares ended up with Blue Star and he did not personally profit from the transaction. In response to the circulation of the draft report in September 1998the Commission was informed by Maurice Kidd that an adjustment had been made between Cullen and Blue Star whereby the profit element on the re-sale of the 398,000 shares had been subsequently credited to Blue Star. The Commission however observes that:
1. Eric Watson obtained legal advice at the time, it appears, about his own position under the insider trading law.
2. Eric Watson's own schedule of trading (at Appendix C) purports to show the transfer of the 398,000 shares to Richard Johnston and Craig Joynt on 16 May 1997.
3. when the Commission's investigations began, Richard Johnston (writing on behalf of Seahunter on 27 August 1997) informed the Commission that the 398,000 shares had been acquired "at the instructions of, and on behalf of, private interests of Mr Eric Watson".
The Commission also notes that a parcel of 398,000 MPL shares was sold on the market on 10 June 1997, at this time in the name of Kitchener (Appendix B refers).

Funding
Richard Johnston has informed the Commission that, apart from the purchase of the 398,000 shares on 16 May 1997, all of the MPL shares acquired by the three interests were paid for out of Eric Watson's current account held in the name of Cullen (being a BNZ account held in Auckland). He said that this account included sums of money owned by himself and Craig Joynt beneficially. In relation to the 398,000 shares, he said that this was funded from Seahunter's account with J Henry Schroder Bank AG the bulk of which had come from the later sale of 300,000 MPL shares on 27 May 1997 (being part of the 800,000 bought on 27 March 1997). On analysis it would appear that the purchase of the 398,000 MPL shares had also been funded by Cullen.
The Commission was informed that the money held by Cullen for Richard Johnston and Craig Joynt arose from the sale of their former interests in Blue Star (these interests having been sold to Eric Watson who later sold to USOP). The Commission was informed that Eric Watson, Richard Johnston and Craig Joynt each had separate money with Cullen and each person's money was used to purchase that person's shares. No accounts have been provided to the Commission in support of this.
In relation to the purchase of the 500,000 shares on 28 April 1997 (instructions for which were routed through Switzerland and London), it appears that the funds for this acquisition were transferred out of Eric Watson's account with Cullen in Auckland to J Henry Schroder Bank AG in Switzerland. They were then transferred back to New Zealand to pay Cavill White.
Cullen is a private investment vehicle of Eric Watson. The Commission was informed that it is also used (to a lesser extent) by Richard Johnston and Craig Joynt. The directors of Cullen are Eric Watson and Richard Johnston, and Eric Watson is the sole shareholder. William Gibson is its sole employee and reports to Eric Watson and Richard Johnston.
Reconciliation of Interests
At the time of the hearings on 11 and 12 May 1998 no reconciliation had been completed as to the respective interests of Eric Watson, Richard Johnston and Craig Joynt in the MPL shares. Are conciliation was only provided to the Commission at the end of May 1998. It was made as a result of the specific request from Members at the time of the hearings. It also has to be borne in mind that the subject shares were by this time no longer owned by them but had been re-sold some twelve months previously. (A copy of the reconciliation that was provided to the Commission can be found at Appendix C.)
US Office Products Company
Eric Watson is a shareholder in USOP and carries the USOP title of president of the international division. USOP has informed the Commission that this is an honorary title. He is remunerated indirectly by USOP as the owner of Blue Star. Part of his remuneration arrangements include a contingency payment known as an "earn out". This is based on Blue Star's acquisition activity. In particular, it entitles Eric Watson to receive additional shares in USOP should a multiple of the fiscal 1999 pre-tax earnings of Blue Star exceed the 1999 value of the USOP shares which Eric Watson received in 1996 (when USOP acquired Blue Star).
USOP has a written policy on inside information and insider trading which applies to employees of USOP and those of its subsidiaries. At the time of the trading in the shares of MPL, the policy stated (inter alia) as follows:
You may not trade in securities of the Company [USOP] (or any other entity, such as a customer, supplier, possible acquisition target, or competitor) at any time that you possess material, non-public (what is described below as inside) information about the Company (or about such other entity).
You may not convey to any other person (tip) inside information regarding the Company (or any other entity).
Eric Watson said he did not know whether he was subject to this policy. He was asked whether he reported his trading to USOP at the time. He said that he had and, in particular, Jonathan Ledecky of USOP was well aware of his buying. Maurice Kidd also said that Jonathan Ledecky would have been aware that Eric Watson was a shareholder in MPL. This however is not consistent with what Jonathan Ledecky has told the SEC. He says that he was not aware of Eric Watson's trading and he expressed great surprise to the SEC on hearing about it.