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New Zealand Securities Commission |
Last Updated: 9 November 2014
AQUILINE HOLDINGS LIMITED
20 September 2004
Report on registered prospectus and certain advertisements
1.
The Securities Commission has reviewed the registered prospectus and certain
advertising for an offer of converting preference shares
and redeemable
preference shares ("Offer") of Aquiline Holdings Limited ("Aquiline"). The
review followed the launch of Aquiline's
offer to the public on 14 April 2004. A
prospectus was registered in relation to this offer.
2.
The review related to three issues:
(i)
prospective financial information in launch presentation: whether the inclusion of prospective financial information in the launch presentation for the offer was in breach of securities law because no such prospective financial information was included in the registered prospectus for the offer.
(ii)
advertisement in daily newspapers: whether a newspaper advertisement for the offer was likely to mislead or confuse investors about their participation in any growth of Aquiline during the period prior to conversion of the converting preference shares.
(iii)
registered prospectus - description of share price: whether the
registered prospectus for Aquiline's offer of converting preference shares and
redeemable preference shares omitted to
include a material particular, namely
sufficient detail about the mechanism used by the Board when setting the share
price for the
ordinary shares into which the converting preference shares will
convert.
3.
The Commission considered both written and oral submissions from Aquiline on
the three issues.
4.
The Commission has decided to briefly report its findings to emphasise for
issuers the standards of disclosure required when money
is raised from the
public. A registered prospectus must contain all material information about the
offer of securities to which it
relates. Advertisements must not be likely to
mislead, deceive, or confuse investors.
Prospective financial
information in the launch presentation
5.
Following media reports and complaints from the media the Commission reviewed
information provided by Aquiline in the presentation
made at the launch of the
Offer on 14 April 2004.
6.
The launch presentation included information about Aquiline's expected shareholder return on page 12. It stated that -
"By 1 July 2006 we are targeting:
On this basis
Aquiline expects to deliver a Total Shareholder Return ("TSR") of 40% p.a. over
the next two financial years - 2004-05
and 2005-06".
7.
The Commission firstly considered whether the information on page 12 of the
launch presentation was "prospective financial information"
in terms of the
Securities Act 1978 and the Securities Regulations 1983.
8.
The Securities Regulations 1983 defines the term "prospective financial
information" as having the meaning given to it under generally
accepted
accounting practice. The term "generally accepted accounting practice" is
defined in the Securities Regulations 1983 as
having the same meaning as in
section 3 of the Financial Reporting Act 1993. The Financial Reporting Act 1993
states that generally
accepted accounting practice is to be ascertained by
reference to applicable financial reporting standards. Financial Reporting
Standard
29 ("FRS-29") defines "prospective financial information" as
"information about future financial performance, future financial position,
future cash flows, and future movements in equity based on assumptions about
future events and courses of action. Prospective financial
information includes
prospective financial statements, the notes to the prospective financial
statements and any narrative relating
directly to the prospective financial
statements".
9.
The Commission formed the view that the information in the presentation about
Aquiline's targeted position and the stated expectation
to deliver a total
shareholder return of 40% p.a. over the next two financial years falls within
the definition of "prospective financial
information" in FRS-29.
10.
Regulation 15 of the Securities Regulations states that if there is a
registered prospectus for securities to which an advertisement
relates, the
advertisement must not contain prospective financial information unless the
advertisement refers to the registered prospectus
and the prospective financial
information is also contained in the registered prospectus.
11.
The registered prospectus for the Offer did not contain the information
stated in the presentation relating to Aquiline's targeted
position and the
expectation to deliver a total shareholder return of over 40% p.a. over the next
two financial years. The prospectus
did not appear to contain any prospective
financial information.
12.
Consequently, the Commission formed the view that the inclusion of
prospective financial information in the launch presentation for
the offer was
in breach of the Securities Act and the Securities Regulations and in particular
regulation 15, as no such prospective
financial information was included in the
registered prospectus for the Offer.
13.
The Commission decided not to take any action on this matter as Aquiline
withdrew the prospective financial information from the launch
presentation when
the matter was raised by the Commission.
14.
Aquiline's view is that the information on page 12 of the launch presentation
was presented as targets which had been adopted by the
Board and not as
forecasts or projections. Aquiline states that it had withdrawn the information
from the launch presentation to
minimise adverse publicity and damage to its
public offer rather than because it agreed that the information was prospective
information.
Advertisement in daily newspapers
15.
After a complaint about a newspaper advertisement in the daily newspapers
promoting the offer, the Commission reviewed the information
in the
advertisement to ascertain whether or not the advertisement was misleading in
terms of regulation 8 of the Securities Regulations
1983. A copy of the
advertisement is attached, marked "A". The advertisement promoting the offer of
converting preference shares
and redeemable preference shares contained a graph
which showed the share price growth of the ordinary shares, and the heading "An
opportunity to be part of the Aquiline growth story for the first
time".
16.
Regulation 8 of the Securities Regulations states that no advertisement shall
contain any information sound, image, or other matter
that is likely to deceive,
mislead, or confuse with regard to any particular that is material to the offer
of securities contained
or referred to in the advertisement.
17.
Aquiline contended that the title of the advertisement and the graph were not
misleading because the offer of the converting preference
shares was in fact the
first opportunity for investors to participate in Aquiline's growth and there
was nothing in the advertisement
to suggest that holders of converting
preference shares would participate in the growth of the company prior to
conversion. Aquiline
submitted that there is no requirement for it to state the
conversion ratio in an advertisement, and that a reasonable investor would
understand that conversion would occur on the basis of a pre-set
formula.
18.
The Commission was of the view that the newspaper advertisement as a whole
was likely to mislead or confuse investors as the title
of the advertisement,
the graph in relation to the price of ordinary shares and the lack of
information about conversion ratios when
considered together gave an impression
that shareholders would participate in Aquiline's growth during the term of
their investment
in the converting securities, whereas in fact, any
participation in the growth (if any) would only commence after 2 years, upon the
conversion into ordinary shares. The advertisement omitted to mention that
conversion of the converting preference shares into ordinary
shares is not on a
fixed ratio basis, or determined by reference to the present share price, but
will be determined by reference
to a formula based on the price of ordinary
shares, set by the board, as applying at the date of conversion.
19.
The Commission formed the view that the newspaper advertisement for the
securities offered by Aquiline breached regulation 8 of the
Securities
Regulations 1983 and was likely to mislead or confuse investors about their
participation in any growth of Aquiline during
the period prior to conversion of
the converting preference shares.
20.
Consequently, at a meeting on 12 May 2004 the Commission decided to prohibit
the distribution of the newspaper advertisement under
section 38B of the
Securities Act.
Registered Prospectus - description of share
price
21.
Aquiline's share price is set by the board at six monthly intervals i.e., the
share price is not market driven. Aquiline's shares
are not listed by New
Zealand Exchange Limited.
22.
In relation to the share price the registered prospectus (on page 18) stated -
"The Board sets the share price of the Ordinary Shares at six monthly
intervals, based on the net profit after tax projected by the
Board for the
ensuing six month period. The Board sets the six monthly share price taking the
above factors into account, plus its
judgement of the supply and demand for AHL
equity capital. The share price set by the Board is the price at which new
Ordinary Shares
at that time are offered for subscription by AHL, or previously
allotted shares are offered for sale by Shareholders using the Capital
Register.
Shareholders are not required to use the Capital Register, and Shareholders who
sell their Ordinary Shares by other means
are not bound by this set Share Price.
However, as mentioned above, for the period 1 July 2003 to 8 March 2004, 88% of
all Ordinary
Share sales (excluding sales to related parties) took place through
the Capital Register, at the set Share Price."
23.
The Commission considered that the registered prospectus did not contain an
adequate description of the process by which the board
arrives at the share
price and that the factors taken into account by Aquiline in setting the share
price and the methods of setting
the share price were material to the offer of
securities requiring disclosure in the registered prospectus.
24.
The Commission also considered that the statement in the registered
prospectus about setting the share price omitted material information
about
methods and factors used by the board in setting the share price. The
description of the methods for setting the share price
should contain all
available information about the setting of the share price and about the factors
taken into account by directors,
including any price/earnings multiple range
within which the board sets the price.
25.
Consequently, at the meeting on 12 May 2004, the Commission formed the view
that the registered prospectus of Aquiline for an offer
of converting preference
shares and redeemable preference shares omitted a material particular about the
securities, namely sufficient
detail about the mechanism used by the board when
setting the share price for the ordinary shares into which the converting
preference
shares will convert.
26.
Aquiline was informed of the Commission's view and given an opportunity to
comment. The Commission also provided guidance on the information
Aquiline could
include in the prospectus to rectify the matter. Aquiline instead chose to close
the offer and on 14 May 2004 amended
its registered prospectus to bring forward
the closing date of its Offer from 31 December 2004 to 14 May 2004.
27.
Aquiline's view was that the prospectus did contain a full description of the
procedure used by the board to set the share price and
that there was nothing
more which Aquiline could usefully have added to that description. Aquiline
contended that the prospectus
was clear and that the share price was subjective
in that it was set by the board, using its judgment, and taking into account the
matters described in the prospectus.
28.
Aquiline made submissions on the matters at a hearing held on 1 September
2004. After hearing Aquiline's submissions at that meeting
the Commission
confirmed its earlier opinion regarding the registered prospectus and the
advertisement.
29.
Although the Commission considered Aquiline's registered prospectus to have
omitted a material particular, it has decided not to commence
the process of
formal cancellation of the registration of the prospectus under section 44 of
the Securities Act because the offer
has been withdrawn. It has decided it
should comment on the matters by way of a report published under section 28A of
the Securities
Act 1978.
30.
The Commission is of the view that where companies raising money from the public choose to use subjective pricing mechanisms for their shares then this needs to be very clearly highlighted for investors, along with all material details of any processes and procedures that will be undertaken to price the shares. Aquiline's prospectus was inadequate in the way it explained this for investors.
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