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

Insider Trading Issues
Part I Securities Amendment Act 1988

Part I of the Amendment Act contains statutory provisions relating to insider trading in the shares of companies listed on the NZSE.
Section 2 defines inside information in relation to a public issuer (a listed company) as meaning:
1. .... information which -
  
  Is not publicly available; and
  
  Would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available:
1. Section 3(1) defines insiders in relation to a public issuer as including:
  
  A person who, by reason of being a principal officer, or an employee, or company secretary of, or a substantial security holder in, the public issuer, has inside information about the public issuer or another public issuer:
  
  A person who receives inside information in confidence from a person described in paragraph (a) or paragraph (b) of this subsection about the public issuer or another public issuer:
The liability of insiders is set out in sections 7 and 9. Section 7 deals with liability where insiders trade in securities of a public issuer. Section 9 deals with the liability of insiders for tipping. There are also counterpart provisions where trading and tipping take place in relation to the securities of another public issuer (sections 11 and 13).
At the time of the trading in the MPL shares, MPL was listed on the NZSE. Blue Star however has never been a listed company. In these circumstances a director of Blue Star, or a person receiving inside information in confidence from Blue Star, would not ordinarily be an insider of Blue Star for the purposes of the insider trading provisions. However a person receiving information from MPL (then a listed company) may be an insider of MPL and may be liable for dealing in MPL, or for tipping others to deal in MPL.
In addition to the volume of documentary evidence provided to the Commission about the takeover negotiations, Members have received oral evidence from the parties. This was received from Jonathan Hislop, Steven McCollam and Scott Perkins (representing the McCollam interests), and from Maurice Kidd and Eric Watson (representing Blue Star).
Members have carefully considered all the evidence presented to the Commission on the discussions that took place between the McCollam interests and Blue Star in relation to the takeover. On the basis of the evidence it appears that no due diligence was undertaken by Blue Star into the affairs of MPL in the course of the discussions. On the basis of the evidence it appears that the representatives of the McCollam interests did not communicate inside information about the trading and financial position of MPL to Blue Star or its negotiators in the course of the discussions. Indeed it appears that those representing the McCollam interests had a conscious policy of acting with discretion when it came to this and they were careful to ensure that only public information was communicated to the bidder.
However the position of Eric Watson has to be considered given his role in the matter (leading negotiations on behalf of Blue Star and USOP) and his trading in MPL shares during the course of the takeover negotiations. One question arises in particular, namely, whether Eric Watson's knowledge or understanding of the intentions of the McCollam interests (concerning the sale of their controlling stake in MPL) was such that it may have constituted inside information about MPL received in confidence from the McCollam side.
The acquisition was conducted under confidentiality (paragraph 17 refers). Looking at the documents by themselves, in particular the reports to USOP by Eric Watson, it would appear that at least by 19 March 1997 there was some measure of understanding that the McCollam interests would sell their MPL shares (paragraph 18 refers). This is again apparent in the communication from Eric Watson to Jonathan Ledecky on 1 April 1997 where he stated that we now have an understanding with the principal shareholders of McCollams (paragraph 19 refers). The position then appears to have been put on hold until 1 May 1997 when Eric Watson informed Jonathan Ledecky that he had that day agreed a deal in principle with the McCollam interests and he went on to say that he had their firm agreement to accept (USOP) shares (paragraph 20 refers). The arrangements were then altered (on 15 May 1997) to a cash offer of $2.75 to minority shareholders conditional on the McCollam interests separately agreeing to take up USOP shares. This represented the final arrangements and which were then announced to the market the following day. The agreement between the McCollam interests and Blue Star was signed on 4 June 1997. It is perhaps significant that the report to MPL shareholders (commissioned by the independent directors) includes a comment that 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 (those shares referring to the MPL shares held by the McCollam interests).
The Commission also received oral evidence on these matters. In general witnesses did not accept that there had been any firm agreement between the McCollam interests and Blue Star in the course of the takeover negotiations or that there was any certainty that the McCollam interests would sell their shares. This was the tenor of the evidence of witnesses who had participated on both sides of the negotiations. Eric Watson said that this was the position even on the day of the announcement of the takeover offer on 16 May 1997. He was asked how the negotiations (with the McCollam interests) stood that day. He gave evidence as follows:

Very uncertain, I mean it almost fell over again at the last minute because we tried to reduce the price again, and the share price of USOP was moving about all over the place. And so we negotiated on that deal for some time before we finalised something. That was - it was still uncertain. In my view, just keep the thing going, just keep it going, and we'll sort it out as we go; ultimately we did.

Eric Watson was asked whether it was a big risk announcing the takeover when this condition was left swinging. He responded:
Well it was a risk. It wasn't - it was just a risk. In the context of the size of Blue Star and everything else we were doing, it really wouldn't have been a major issue, we would have worked our way through it somehow or other.

The oral evidence of Eric Watson was that the deal with the McCollam interests was not done until the agreement was signed i.e. on 4 June 1997. Eric Watson was asked about the various reports that were made to USOP in the course of the negotiations (paragraphs 18 to 21 refer). He did not accept that these represented the true positions of the negotiating parties at the time. He said that these were more in the nature of tactical manoeuvring between himself and Jonathan Ledecky of USOP. The reports however do indicate to the Commission that at minimum there was a reasonable expectation on the part of the Blue Star interests based on their dealings with the McCollam interests that an agreement would be concluded with the McCollam interests to acquire their MPL shares.
Eric Watson was also asked whether he had communicated any information to Richard Johnston and Craig Joynt about the takeover negotiations with the McCollam interests. He said that the arrangements to invest in MPL had been agreed before the takeover talks had started. He had then simply said to Richard Johnston and Craig Joynt that he liked the look of the stock and it would be a good investment. He stated that he did not pass any information to Richard Johnston and Craig Joynt that Blue Star was considering, or involved in, takeover discussions with the McCollam interests. This was supported by Richard Johnston in his evidence.
Eric Watson (through the agency of Craig Joynt) started buying shares in MPL from 23 October 1996. This was just before the commencement of the takeover discussions with the McCollam interests in mid-November 1996. Share buying continued during the discussions right down to the very day of the announcement of the takeover on 16 May 1997.
In the view of the Commission there is a question as to whether Eric Watson may have become an insider of MPL by reason of section 3(1)(c) of the Amendment Act i.e. by virtue of having received inside information in confidence about MPL, in particular, from the McCollam interests about their intentions concerning the disposition of their controlling block of shares. There is also a question as to whether Eric Watson may have become an insider of MPL by reason of section 3(1)(b) i.e. by virtue of being a substantial security holder of MPL and having that same information. (A substantial security holder is explained in the following section of the report.)
Finally, there may be a question (that is if Eric Watson did become an insider of MPL whether on one or other of the grounds in paragraph 59) of liability for tipping under section 9 of the Amendment Act. Eric Watson has said that the MPL investment was agreed with Richard Johnston and Craig Joynt before the takeover talks had started. He has rejected any suggestion that he informed them about the discussions however, in terms of the liability under section 9, it does not necessarily require the communication of inside information before liability arises. Simply advising or encouraging another person to buy shares (as part of a continuing arrangement) may be enough. Richard Johnston and Craig Joynt were close associates of Eric Watson and, the Commission is informed, had participated in a good many investment arrangements together. Both would have been well aware that Blue Star and MPL were in the same line of business and that Blue Star pursued an active acquisition programme. It had already acquired the businesses of U-Bix, Wang and Whitcoulls plus a number of other unlisted entities.
Eric Watson has through his counsel submitted to the Commission that his actions have not breached the insider trading law, in particular, he has submitted:
1. that information concerning the intentions of a shareholder is not information "about the public issuer" and hence is not "inside information" for the purposes of the law,
2. in any event there was no certainty that the McCollam interests would sell their shares, at least before 16 May 1997,
3. that the investment arrangements between him, Richard Johnston and Craig Joynt pre-dated the commencement of the takeover discussions and hence liability for tipping would not arise (assuming that inside information was involved).
Eric Watson also has emphasised to the Commission that he took legal advice at the time of the purchase of the 398,000 MPL shares and he was told that there was nothing to prevent him proceeding with the acquisition. In these circumstances he says that he acted reasonably.