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PROPOSED CLASS EXEMPTION FOR SHARE AND UNIT PURCHASE PLANS

Introduction

1.

The Commission has received an application from New Zealand Exchange Limited ("NZX") for a class exemption to assist NZX issuers to undertake limited fund-raising from existing security holders by way of share or unit purchase plans.

2.

In brief, the proposed class exemption would apply to share or unit purchase plans that give every shareholder or unit holder the opportunity to subscribe for not more than $5,000 worth of securities in any one year. This is similar to a number of individual exemptions the Commission has granted for such schemes. The application also suggests an approach whereby participation in these plans can be made available to beneficial owners of shares or units.

3.

The Appendix to this paper contains a proposed draft class exemption notice for share and unit purchase plans. The conditions that the Commission considers may be appropriate for such an exemption are set out in the draft notice. The Commission welcomes comments from interested parties, particularly about the proposed mechanism for extending participation in the schemes to beneficial owners of shares or units. We would welcome comments on the following:

(a): will the proposed class exemption enable offers under share or unit purchase plans to be made effectively to beneficial owners of shares or units through custodians?
(b): is the proposal to require certification by custodians workable, or would this impose an administrative burden on custodians?
(c): is there another way to extend participation in these plans to beneficial owners of shares and units that is simpler to operate and that still offers reasonable certainty for issuers that they are not exceeding the $5,000 per shareholder or unit holder limit?

Discussion

4.

The Commission has previously granted exemptions to two companies in relation to share purchase plans, namely the Securities Act (Property for Industry Limited) Exemption Notice 2004 and the Securities Act (Nuplex Industries Limited) Exemption Notice 2004, and to a manager of a unit trust in relation to a unit purchase plan, the Securities Act (AMP Multiplex Management Limited) Exemption Notice 2005. The Commission considers that a class exemption would be appropriate in this area, as the principles behind the exemption would appear to be applicable to any listed company or listed unit trust.

5.

The effect of the proposed class exemption would be that NZX issuers could offer shares or units under a share or unit purchase plan that gives existing investors an opportunity to subscribe for more securities at a discount on market price, by way of a disclosure document setting out the terms of the share or unit purchase plan, instead of having to provide a prospectus and an investment statement to potential investors. To enable an NZX issuer to make an offer of securities by way of this disclosure document, the proposed class exemption would exempt NZX issuers from:

(a): sections 37 and 37A of the Securities Act 1978; and
(b): all regulations contained in the Securities Regulations 1983 (except regulation 8).

6.

The policy basis for the proposed class exemption is that issuing small numbers of shares or units to existing shareholders or unit holders is similar to issuing shares in lieu of dividends, and that similar levels of control and protection are appropriate. The terms of the Securities Act (Dividend Reinvestment) Exemption Notice 1998 are relevant in this regard. This exemption allows shareholders to reinvest dividends in the company by acquiring shares without the company needing to produce a registered prospectus or investment statement. This applies to equity securities, units in a unit trust, or interests in a group investment fund where the securities are offered under a dividend reinvestment plan only to persons who already hold securities of the issuer of the kind being offered.

7.

The Commission is of the view that where shares are offered through a dividend reinvestment plan, full disclosure of material information about the securities and the issuer is not necessary. Full disclosure about those securities (by means of an investment statement and a prospectus) will have been made at the time of the initial offer. In the case of a listed issuer, this information is augmented by continuous disclosure announcements and annual and half-yearly reporting. An important consideration is the relatively small amounts involved.

8.

The Australian Securities and Investments Commission has granted a similar exemption to the proposed class exemption. This allows companies or registered schemes that are listed on the Australian Stock Exchange to offer existing security holders small numbers of securities without the need for a prospectus.

9.

The Australian Securities and Investments Commission reaffirmed its policy in this area in 2002 through Class Order 02/831, which also clarified who can receive offers under the exemption. Class Order 02/831 provides that a trustee or nominee expressly noted on a company or scheme register may receive an offer for each occasion they are separately recorded as a trustee or nominee for a different beneficiary named on that register. This approach reflects provisions of the Australian Corporations Act 2001 that provide for recognition of trustees of a trust on Australian securities registers.

10.

However, the Australian approach to the issue of custodians holding securities for beneficiaries cannot be applied to the proposed New Zealand class exemption, as section 92 of the Companies Act 1993 and section 51(4) of the Securities Act do not permit notice of a trust to be entered on a securities register. Therefore, the person registered as the holder of a security on an issuer's securities register is the custodian, and, for the issuer's purposes, the custodian is the sole shareholder or unit holder.

11.

An important policy consideration regarding this proposed exemption is that it should apply only to relatively small offers (in terms of the number of additional securities each holder can take up). This is the reason for the $5,000 limit on the securities that any existing holder can acquire in any year. The Commission wants to extend the exemption to permit offers to be made to beneficial owners whose securities are held on their behalf by another. In so doing the Commission wishes to adopt a mechanism that provides it with reasonable certainty that these plans are unlikely to be misused to allow larger offers to be made or to allow securities in excess of the limit to be subscribed for, and that also provides issuers with sufficient certainty about the number of securities being allotted (beneficially) to any person.

12.

The Commission considers that the proposal in the draft exemption notice strikes an appropriate balance. This says that an issuer can, under its share or unit purchase plan, allot more than $5,000 worth of securities to a custodian so long as the custodian, before this is done, has certified to the issuer that it holds securities as a custodian, sets out how many beneficial owners it holds the securities for, and how many securities it seeks on behalf of each beneficial owner. The custodian is also required to undertake to the issuer that it will not accept on behalf of any beneficial owner in any 12-month period securities (of that issuer) with a total issue price of more than $5,000. The issuer can then issue the securities if it is in turn reasonably satisfied that in any 12-month period the total issue price of the specified securities issued to any beneficial owner is not more than $5,000, whether issued:

(a): through any custodian(s); and/or
(b): if the beneficial owner is also a security holder, in their own right as a security holder.

13.

The Commission has considered it appropriate to grant the previous individual exemption notices because:

(a): the exemptions have allowed issuers to undertake limited fund-raising from existing shareholders or unit holders. The exemptions have reduced compliance costs for issuers, and the offers have allowed shareholders or unit holders to purchase securities at a discounted price;
(b): the exemptions have also been limited in the amount that can be raised in any year, so that any significant fund-raising will require full offer documents; and
(c): the conditions of the exemptions have required that investors receive certain important information about the offer. As the offers under the previous exemptions could be made only to existing shareholders or unit holders, and as the issuers were subject to the continuous disclosure requirements of the Securities Markets Act 1988 and the NZX Listing Rules, investors had access to key relevant information on which to base their investment decision.

14.

The Commission is of the view that the proposed class notice is consistent with the policy of the individual exemptions it has granted for share and unit purchase plans.

Concluding Comments / Timing

15.

The Commission is supportive of the idea of a class exemption to assist NZX issuers to undertake limited fund-raising from existing security holders by way of share or unit purchase plans. However, it has not at this time made any formal decision to grant the exemption.

16.

The Commission welcomes comments from interested parties, in particular about the proposed mechanism for extending participation in the schemes to beneficial owners of shares or units. As noted above, we would welcome comments on the following:

(a): will the proposed class exemption enable offers under share or unit purchase plans to be made effectively to beneficial owners of shares or units through custodians?
(b): is the proposal to require certification by custodians workable, or would this impose an administrative burden on custodians?
(c): is there another way to extend participation in these plans to beneficial owners of shares and units that is simpler to operate and that still offers reasonable certainty for issuers that they are not exceeding the $5,000 per shareholder or unit holder limit?

17.

We also welcome comments on any other relevant issues relating to the proposed class exemption. People are encouraged to submit comments to the Commission at the earliest opportunity. Please indicate in your comments if you would like to be consulted on the drafting of the exemption notice.

18.

Any comments received on the matters raised in this discussion paper will be subject to the Official Information Act 1982. It is the Commission's usual practice to make submissions available on request. If you would like us to withhold information included in comments on this paper please state this clearly in your response. Any request to withhold information will be considered in accordance with the Official Information Act 1982.

19.

Comments on this discussion paper should be sent to the Commission by 16 May 2005.

Postal: Securities Commission
PO Box 1179
WELLINGTON
Attn: Meredith Pearson

Facsimile: (04) 472 8076

Email: meredith.pearson@seccom.govt.nz

20.

This discussion paper is available from the Commission's website:
www.seccom.govt.nz

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