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Report on Inquiry into trading in the shares of McCollam Printers Limited [1998] NZSecCom 1 (18 December 1998)

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

18 December 1998

1. Introduction

1. 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.
2. This report contains the findings and comments of the Commission pursuant to the revised terms of reference.
3. 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.
4. 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.
5. 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.

2. Acquisition of McCollam Printers Limited by Blue Star Group Limited

6. 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).
7. 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.
8. 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.
9. 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.
10. 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.

100. Investigations

11. 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."
12. 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.
13. 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.
14. 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.

4. Results of Investigations

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

Takeover Discussions

16. 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).
17. 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.
18. 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.

19. 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.

20. 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.

21. 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."
22. 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.
23. 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.)
24. 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.

25. 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

26. 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;
    100. 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.

27. 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.
    100. 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.
28. 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;
    100. 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

29. 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.
30. 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

31. 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.
32. 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.
33. 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,
    100. 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.

34. 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

35. 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

36. 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,
    100. 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

37. 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

38. 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.
39. 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.
    100. 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.
40. 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.
    100. 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

41. 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.

42. 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.
43. 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

44. 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

45. 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).
46. 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.

5. Insider Trading Issues

Part I Securities Amendment Act 1988

47. Part I of the Amendment Act contains statutory provisions relating to insider trading in the shares of companies listed on the NZSE.
48. Section 2 defines inside information in relation to a public issuer (a listed company) as meaning:
    1. .... information which -
       1. Is not publicly available; and
       2. Would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available:
49. 2. Section 3(1) defines insiders in relation to a public issuer as including:
       2. 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:
       100. 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:
50. 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).
51. 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.
52. 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).
53. 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.
54. 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.
55. 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).
56. 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.

57. 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.
58. 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.
59. 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.)
60. 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.
61. 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,
    100. 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.

6. Issues Relating to Substantial Security Holder Disclosure

Part II of the Securities Amendment Act 1988

62. Under Part II of the Amendment Act obligations are imposed on a person who has become a substantial security holder in a listed company to give notice to the company and to the NZSE. A substantial security holder is a person who has a relevant interest in 5% or more of the voting securities of the listed company. A substantial security holder must also give notice of changes in relevant interest equivalent to 1% or more of the total voting securities, and of changes in the nature of relevant interest held. Notice of cessation as a substantial security holder must also be given i.e. where the relevant interest falls below 5%. The form of any notice required to be given under Part II is prescribed in the Securities (Substantial Security Holders) Regulations 1997. (At time of the trading in MPL the 1989 regulations applied.) The notice is required to be given as soon as the person knows, or ought to know, of the matter giving rise to the obligation.
63. The purpose of the legislation is to ensure that investors are fully and promptly informed about the ownership and control of the listed companies in which they invest, thereby facilitating a transparent market. It is particularly valuable in the context of takeovers where knowledge of a person building a stake in a company is of prime importance to the market generally.
64. The term relevant interest is defined in section 5 of the Amendment Act. A copy of this provision is attached at Appendix D. A person has a relevant interest when that person is a beneficial owner of the shares (section 5(1)(a)). A person also has a relevant interest when that person has the power to acquire or dispose of the shares or the power to control the acquisition or disposition of the shares by another person (section 5(1)(d) and (e)). This also extends to any trust, agreement, arrangement or understanding relating to the shares (whether or not the person is a party to it) where the person may at any time have the power to do these things (section 5(1)(f)). In terms of the legislation, it does not matter whether the power is express or implied, is direct or indirect, or whether it is exercisable presently or in the future, or alone or jointly with another person or persons (section 5(4)).
65. Under section 32 the Court can make a range of orders (extending to the forfeiture of shares) whenever there are reasonable grounds to suspect that a substantial security holder has not complied with the law. These orders can be made on the application of the persons specified in section 31, including, any person who sold or purchased shares at a time when a substantial security holder had not complied with the disclosure obligations. The substantial security holder can become separately liable to these persons under section 34, as well as to any person who traded with the substantial security holder. In these circumstances the liability is based on the difference between the price that was actually payable and the amount offered pursuant to any subsequent takeover made by the substantial security holder or any related company.
66. At the time of the takeover of MPL by Blue Star, MPL had a total issued share capital of 23,721,916 ordinary shares. The total number of MPL shares acquired by the combined interests of Eric Watson, Richard Johnston and Craig Joynt amounted to 2,403,800 shares, equating to 10.13% of MPL. Of this total, 1,698,000 shares were acquired in the name of Seahunter, equating to 7.16% of MPL.
67. No substantial security holder notice was given in relation to these interests.
68. The position taken by Eric Watson, Richard Johnston and Craig Joynt appears to be that, at Eric Watson's initiative, they had together agreed to participate in a venture to buy shares in MPL. Eric Watson said that the intention was that he should acquire the first 4.99% and, thereafter, the shares would go to Richard Johnston and Craig Joynt for their own separate interests. Eric Watson said it was an essential part of the arrangements that on no account was he to exceed the threshold of 4.99%.
69. At the time of his appearance before the Commission Eric Watson was asked how he was able to determine the shareholding position, in particular, as to who owned what MPL shares at any particular point in time. He said that they hadn't sat down to sort this out however as far as he was concerned the first 4.99% would have been his and anything above that would have gone to the other two participants (Richard Johnston and Craig Joynt). Eric Watson was asked how this worked and how it was controlled. The transcript of evidence records the following exchange between Joanna Perry (Commission Member) and Eric Watson:

Ms Perry: ... How at any point in time can you be certain that in any share trading you have not breached, or you have not reached 5 percent, and therefore, need to file a Substantial Security Holder Notice, or that you've then gone 1 percent up or 1 percent down, if the three of you can deal on the accounts, if the money's coming out of a variety of bank accounts. Like it - to me, it sounds as though somebody needs to have immense control over pulling it all together to make sure that you do not breach the law by ever going - to getting to be 5 percent. Are you sure in your own mind that happens, that that control is there for your holdings? Because it's putting you in a very bad position if it's not.

Mr Watson: I - there's a few answers to your question. We have reached 5 percent in other New Zealand public companies and where appropriate we've made the filings. The - in my mind my advisors, be they Johnston, Gibson, Strowger, Kidd, should be talking to each other. They should have my interests under control, and I believe that to be the case. I'd be disappointed if it wasn't. My focus is on the macro ... I'm comfortable that I trust the people around me. I hope I don't have to change it.

70. Eric Watson then provided a schedule of his trading to the Commission at the end of May 1998, after his appearance before Members earlier in the month. The schedule (at Appendix C) shows his accumulation of shares throughout the period. In particular, it shows that the shares came to him in the first instance and that transfers to Richard Johnston and Craig Joynt then occurred whenever the 5% threshold was threatened.
71. The schedule of transactions completed at the end of May 1998 (at Appendix C) is the only evidence that the interests of the three have been reconciled. This was some twelve to eighteen months after the transactions had occurred and a year after the shares had been re-sold.
72. There is also the nature of the relationship between the three participants. It appears from the evidence that all three of them have had a close relationship both at the business level and at the personal level, and that this has existed for some considerable time.
73. There is also the matter of funding. At the time oral evidence was received from the parties in mid-May 1998 it was not clear to the Commission as to how the share purchases in MPL had been funded. Richard Johnston however subsequently informed the Commission that all the money (save for the purchase of the 398,000 shares on 16 May 1997) had come from Eric Watson's current account with Cullen (previously called Watson Investments Limited). Cullen is a private investment vehicle of Eric Watson. The Commission was informed that Cullen's current account also holds some money for Richard Johnston and Craig Joynt (in addition to Eric Watson), however, no accounting records have been provided about this. Looking at the purchase of the 398,000 shares, it appears that this was mostly funded from a re-sale of shares which had been purchased earlier and, on the Commission's analysis, was also funded out of Eric Watson's current account with Cullen.
74. Approximately 70% of the shares acquired were purchased in the name of Seahunter which is a company registered in the British Virgin Islands (a jurisdiction that has a reputation as a regulatory haven). The instructions for one of the Seahunter transactions (the purchase of the 500,000 MPL shares on 28 April 1997) were routed through J Henry Schroder Bank AG in Switzerland and Deutsche Morgan Grenfell in London. Also, payment for these shares came from funds which had been transferred out of New Zealand to Switzerland, and then back to Auckland to pay Cavill White.
75. The Commission also notes the use of different brokers and the use of four different names to undertake the trading (Craig Joynt, Richard Johnston, Kitchener and Seahunter) giving rise to a somewhat complex picture of ownership. On analysis, the brokers' nominee companies, as the registered holders, held for Craig Joynt, Richard Johnston, Kitchener and Seahunter who, in turn, held for the participants. As such, the true beneficial ownership of these interests in MPL has been obscured.
76. When Richard Johnston gave oral evidence to the Commission on 11 May 1998 he described the investment in MPL in different terms to what Eric Watson was to say (paragraph 30 refers). Significantly, Richard Johnston did not then say that he (and Craig Joynt) would only be entitled to shares once Eric Watson had reached 4.99%. The Commission finds this surprising given the importance of this aspect of the arrangements. It was only after Eric Watson had given evidence that Richard Johnston said that in his view also, this was part of the arrangements.
77. The whole matter is characterised by an absence of proper records e.g. about the money of Richard Johnston and Craig Joynt held in Cullen, about the adjustment between Cullen and Blue Star, about transfers of interests in shares, about the ownership of shares held by Kitchener and Seahunter.
78. Having regard to all these things, it is the Commission's opinion that a question of serious breach of the law on substantial security holder disclosure arises in relation to the trading in the shares of MPL. In the view of the Commission there are certainly reasonable grounds to suspect that at the time Eric Watson was either, the beneficial owner of all the shares (with Richard Johnston and Craig Joynt acting as his agents or nominees), or, that the three of them were acting together in this enterprise and each had joint beneficial ownership in all the MPL shares acquired. This was a total of 2,403,800 shares equating to 10.13% of the company. The Commission considers a notice should have been given when 5% was reached(on 27 March 1997). The Commission considers a notice should have been given in respect of subsequent acquisitions of 1% or more. No notices were given and the market was left uninformed about the interests. In the circumstances of the Blue Star takeover that was under negotiation at the time, a substantial security holder notice would have had profound interest so far as the market was concerned. The matter was undoubtedly material.
79. There is also the position of Seahunter, it having acquired 1,698,000 shares equating to 7.16% of MPL. Seahunter did not give notice of this interest. It would have had an obligation to do so unless it qualified as a " bare trustee" (section 6(1)(f) of the Amendment Act).

7. Other Comments

80. Another issue arises in relation to insider trading.Blue Star was not a public issuer (a listed company) for the purposes of the Amendment Act when it took over MPL (a listed company) in 1997. The insider trading law contained in Part I of the Amendment Act will apply where an insider of Blue Star receives inside information in confidence from an insider of MPL and then deals in the shares of MPL. The insider trading law however may not apply where an insider of Blue Star deals in the shares of MPL without having received any inside information from an insider of MPL. This is so notwithstanding that the insider of Blue Star has knowledge of the pending takeover of MPL by Blue Star. In these circumstances, the inside information (the knowledge of the pending takeover) derives from the bidder which is an unlisted company. Had Blue Star been a listed company then liability may arise under section 11 of the Amendment Act in respect of any dealings in MPL by an insider of Blue Star. Section 11 creates liability where an insider of a listed company has inside information about another listed company and deals in the shares of that other listed company.
81. This whole matter raises issues about the policy of section 11 and in particular the circumstances in which liability should arise, the proper scope of the section where the inside information is not information held by the company whose shares are traded, and the relationship of these matters to private remedies. The Commission intends to further consider the policy, ambit and operation of section 11.
82. Eric Watson (whether for his own personal benefit or the joint personal benefit of the three participants) acquired shares in MPL ahead of the announcement of the takeover offer by Blue Star on 16 May 1997. He did so in circumstances where he enjoyed a distinct advantage over the rest of the market by virtue of his knowledge of the intentions of Blue Star in relation to MPL. Irrespective of the terms of the insider trading law, and irrespective of Eric Watson's position under the law, the Commission does not consider that personal trading in these circumstances enhances the reputation and standing of our market.
83. The Commission has also had cause to consider whether the law on substantial security holder disclosure might be enhanced by the introduction of a criminal offence for a case of non-compliance. The MPL shares have been re-sold and as such there is little utility in the Commission taking action under sections 30 to 32 of the Amendment Act. It would be an added deterrent to persons who evade their obligations if they know they can be subject to prosecution.
84. This report does not purport to deal with any issues arising under United States law. It is devoted solely to a consideration of issues under New Zealand law.

7. Principal Observations

85. The principal observations of the Commission in respect of this report are:
    1. It is the Commission's opinion that a question of serious breach of the law on substantial security holder disclosure arises in relation to the trading in the shares of MPL.
    2. A breach of that law if established would give rise to certain remedies by shareholders and others under the Amendment Act.
    100. Irrespective of the terms of the insider trading law and irrespective of Eric Watson's position under the law, the Commission does not consider that personal trading in the circumstances described in this report enhances the reputation and standing of our market.
    4. The Commission intends to further consider the policy, ambit and operation of section 11 of the Amendment Act.

8. Supplementary Statement

86. The Commission draws attention to the Supplementary Statement attached to this report.

1. Referral of Report

87. The Commission proposes to refer the report to:
    1. Australian Securities & Investments Commission
    2. Australian Stock Exchange
    100. Blue Star Group Limited
    4. Institute of Chartered Accountants of New Zealand
    5. Institute of Directors in New Zealand (Inc)
    6. Listed Companies Association
    7. Ministry of Commerce
    8. New Zealand Stock Exchange
    9. Shareholders of MPL in the period October 1996 to May 1997
    10. United States Securities and Exchange Commission
    11. USOP.

Euan H Abernethy
Chairman of the Securities Commission
18 December 1998

SUPPLEMENTARY STATEMENT

1. Relevant parts of a draft of the covering report were sent to affected parties for comment. Following this, Eric Watson sought a meeting with the Commission's quorum. The purpose of this meeting was to seek the Commission's reaction to a proposal by Eric Watson. The Commission decided that any such proposal should be set out in writing to the Commission for consideration. The Commission subsequently received a letter setting out the proposal which Commission Members have considered.
2. The proposal, and the Commission's consideration of it, has not affected the conclusions or comments of the Commission contained in the covering report. It does, however, give rise to some separate comment.
3. Eric Watson stated that he had already supplied detailed submissions to the Commission on areas where he strongly disagreed with many of the observations and factual conclusions in the report. However, he wished to approach the report constructively.
4. To address the concerns raised by the Commission and to bring issues to finality Eric Watson suggested making a proposal:
   1. to establish a fund equalling all profits made on the share dealings covered by the report to be available for claims by any seller of MPL shares, with any unclaimed balance being donated to charity,
   2. to outline steps he has taken and will continue to develop and maintain to clearly delineate his personal holdings in listed securities,
   100. to outline steps he has taken and will continue to develop and maintain to ensure that personnel within the Blue Star group are educated in and mindful of their obligations in trading in listed securities.

Eric Watson wished to pursue this proposal through dialogue with the Commission.

5. The Commission supports any proposal which provides compensation in appropriate cases without claimants having to endure long, costly and uncertain Court procedures. The Commission also supports any steps taken by market participants to ensure compliance with rules relating to disclosure of interests and to ensure that organisations with which they are associated also are educated in and mindful of their obligations in trading in listed securities.
   The Commission would encourage Eric Watson to progress and develop the proposal set out in his letter to the Commission. This, however, will be a matter for him. It will be up to him to make whatever arrangements he thinks are suitable in the circumstances and for possible claimants to assess any such proposal.
6. While the Commission would regard any such steps, particularly the meeting of claims, as a positive move, the Commission does not have powers to effectively take further steps itself to give effect to such arrangements, to bind affected parties or to alter the nature of its report as a result.
7. It is beyond the scope of this report to explore the role which the Commission could play in such cases given wider powers. These could include, for example, the ability to levy administrative sanctions and penalties, to be able to give binding rulings on administrative matters and to clarify its ability to receive binding undertakings from market participants. As it is, the Commission's powers are, for present purposes, limited to reviewing practices relating to securities and commenting on those practices to any appropriate body.
8. That said, however, the Commission would encourage any appropriate arrangement that Eric Watson wishes to make for dealing with any possible claims in a simple and cost effective manner and which may be acceptable to any possible claimants.

Euan H Abernethy
Chairman of the Securities Commission
18 December 1998

Appendix A

Terms of Reference : McCollam Printers Limited

1. Pursuant to sections 10 and 18 of the Securities Act 1978, the Securities Commission has decided to undertake an inquiry into trading in the previously listed shares of McCollam Printers Limited (MPL). The period of the inquiry is 1 January 1995 down to the time the shares were de-listed in August 1997. The inquiry is being undertaken to consider:
   1. whether any person who was an insider of:

MPL
Blue Star Office Technology Limited
Blue Star Investments Limited
Blue Star Group Limited
U.S. Office Products Company,

may have traded in the shares of MPL while in possession of inside information in respect of one or more of the companies;

2. the nature of the trades and the facts and circumstances in which the trading was done;

100. whether any person may at any time have been a substantial security holder of MPL, other than as disclosed in a substantial security holder notice given under and in accordance with the Securities Amendment Act 1988 and the Securities (Substantial Security Holders) Regulations 1989;

4. whether the Commission should comment on these matters or take any other action.

2. For these purposes the Commission wishes to receive evidence as to:
   1. any trading in the shares of MPL undertaken by:

Kitchener Nominees Limited
Seahunter Investments Limited
Eric J. Watson (both for or on his behalf)
any related persons
any other persons;

2. the takeover in 1997 of MPL by Blue Star Investments Limited including the associated agreement for the sale and purchase of shares in MPL between Steven B. McCollam, the McCollam Family Trust, Hector Lang Investments Limited and Intermezzo New Zealand Holdings Limited (as sellers) and a related company of Blue Star Investments Limited (as buyer);

100. all other matters material to the inquiry.

Subject to the Commission's discretion to amend the Terms of Reference as it may consider fit.

20 March 1998
Appendix B

Master List of Trading in McCollam Printers Limited

Total Bought: 2,403,800
Total sold after the takeover announcement: 2,363,000

* for Seahunter

APPENDIX C

This Appendix is not available from the web site.

Appendix D

R.S. Vol. 33 Securities Amendment Act 1988 677 91

Meaning of ''relevant interest''

---(1) For the purposes of this Act a person has a relevant interest in a voting security (whether or not that person is the registered holder of it) if that person---

1. Is a beneficial owner of the voting security; or
2. Has the power to exercise any right to vote attached to the voting security; or

100. Has the power to control the exercise of any right to vote attached to the voting security; or

4. Has the power to acquire or dispose of the voting security; or
5. Has the power to control the acquisition or disposition of the voting security by another person; or
6. Under, or by virtue of, any trust, agreement, arrangement, or understanding relating to the voting security (whether or not that person is a party to it)---
   1. May at any time have the power to exercise any right to vote attached to the voting security; or
   2. May at any time have the power to control the exercise of any right to vote attached to the voting security; or
   3. May at any time have the power to acquire or dispose of, the voting security; or
   4. May at any time have the power to control the acquisition or disposition of the voting security by another person.

(2) Where a person has a relevant interest in a voting security by virtue of subsection (1) of this section and---

7. That person or its directors are accustomed or under an obligation, whether legally enforceable or not, to act in accordance with the directions, instructions, or wishes of any other person in relation to---
   1. The exercise of the right to vote attached to the voting security; or
   2. The control of the exercise of any right to vote attached to the voting security; or
   3. The acquisition or disposition of the voting security; or
   4. The exercise of the power to control the acquisition or disposition of the voting security by another person; or
8. Another person has the power to exercise the right to vote attached to 20 percent or more of the voting securities of that person; or
9. Another person has the power to control the exercise of the right to vote attached to 20 percent or more of the voting securities of that person; or
10. Another person has the power to acquire or dispose of 20 percent or more of the voting securities of that person; or
11. Another person has the power to control the acquisition or disposition of 20 percent or more of the voting securities of that person--- that other person also has a relevant interest in the voting security.

(3) A body corporate or other body has a relevant interest in a voting security in which another body corporate that is related to that body corporate or other body has a relevant interest.

(4) A person who has, or may have, a power referred to in any of paragraphs (b) to (f) of subsection (1) of this section, has a relevant interest in a voting security regardless of whether the power---

50. Is expressed or implied:

13. Is direct or indirect:
14. Is legally enforceable or not:
15. Is related to a particular voting security or not:
16. Is subject to restraint or restriction or is capable of being made subject to restraint or restriction:
17. Is exercisable presently or in the future:
18. Is exercisable only on the fulfilment of a condition:
19. Is exercisable alone or jointly with another person or persons.

(5) A power referred to in subsection (1) of this section exercisable jointly with another person or persons is deemed to be exercisable by either or any of those persons.

(6) A reference to a power includes a reference to a power that arises from, or is capable of being exercised as the result of, a breach of any trust, agreement, arrangement, or understanding, or any of them, whether or not it is legally enforceable.

(7) For the purposes of this Act, a body corporate is related to another body corporate if---

20. The other body corporate is its holding company or subsidiary within the meaning of ---
    1. Sections 158 and 158A of the Companies Act 1955, in relation to any company registered under that Act: or
    2. Sections 5 and 6 of the Companies Act 1993, in relation to any other body corporate; or
21. More than half ---
    1. In nominal value of its equity share capital (as defined in section 158 (5) of the Companies Act 1955) in relation to any company registered under that Act; or
    2. Of its issued shares (other than shares that carry no right to participate beyond a specified amount in a distribution of either profits or capital) in relation to any other body corporate, ---

is held by the other body corporate and bodies corporate related to that other body corporate (whether directly or indirectly, but other than in a fiduciary capacity); or

5. More than half -
   1. In nominal value of the equity share capital (as defined in section 158 (3) of the Companies Act 1955), in relation to any company registered under that Act; or
   2. Of the issued shares (other than shares that carry no right to participate beyond a specified amount in a distribution of either profits or capital), in relation to any other body corporate, -

of each of them is held by members of the other (whether directly or indirectly, but other than in a fiduciary capacity); or

23. The businesses of the bodies corporate have been so carried on that the separate business of each body corporate, or a substantial part thereof, is not readily identifiable; or

10. There is another body corporate to which both bodies corporate are related.