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Proposed class exemption for share and unit purchase plans - Discussion paper [2005] NZSecCom 4 (29 April 2005)

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PROPOSED CLASS EXEMPTION FOR SHARE AND UNIT PURCHASE PLANS

A DISCUSSION PAPER

SECURITIES COMMISSION

29 April 2005

Contents:

Introduction
Discussion
Concluding Comments / Timing
Appendix

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.

20.

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

APPENDIX Securities Act (NZX - Share and Unit Purchase Plans) Exemption Notice 2005

Pursuant to the Securities Act 1978, the Securities Commission gives the following notice (to which is appended a statement of reasons of the Securities Commission).

Notice

1

Title
This notice is the Securities Act (NZX - Share and Unit Purchase Plans) Exemption Notice 2005.
2

Commencement
This notice comes into force on the day after the date of its notification in the Gazette.
3

Expiry
This notice expires on the close of 30 June 2010.
4

Interpretation
(1)

In this notice, unless the context otherwise requires, -

Act means the Securities Act 1978

custodian means a holder of specified securities -

(a)

that -

(i)

is a trustee corporation or a nominee company; and

(ii)

holds those specified securities by reason only of acting for another person in the ordinary course of business of that trustee corporation or nominee company; or

(b)

that holds those specified securities by reason only that the person is a bare trustee of a trust to which the specified securities are subject

NZX means New Zealand Exchange Limited

NZX issuer means -

(a)

a person that is listed on a securities market operated by NZX; or

(b)

the manager of a unit trust that is listed on a securities market operated by NZX

Regulations means the Securities Regulations 1983

share purchase plan means a share purchase plan that complies with clause 5

specified securities means -

(a)

equity securities that are to be issued by an NZX issuer under a share purchase plan to existing holders of securities issued by the NZX issuer; or

(b)

units in a unit trust that are to be issued by an NZX issuer that is a manager of a unit trust under a unit purchase plan to existing holders of units in that unit trust; and

that are to be listed on a securities market operated by NZX

subscription price means the subscription price for the specified securities

unit purchase plan means a unit purchase plan that complies with clause 5.
(2)

Any term or expression that is defined in the Act or the Regulations and used, but not defined, in this notice has the same meaning as in the Act or the Regulations.
5

Requirements for share purchase plan and unit purchase plan
(1)

For the purposes of this notice, a share purchase plan and a unit purchase plan must comply with the following requirements -

(a)

the right to subscribe for the specified securities must be offered to all security holders holding securities of the same class as the specified securities, except a security holder in a jurisdiction outside New Zealand who is excluded by the NZX issuer to avoid a risk of breaching the law in that jurisdiction; and

(b)

the right to subscribe for the specified securities must be offered on the same terms and conditions to all the security holders to whom the offer is made; and

(c)

the right to subscribe for the specified securities must not be renounceable; and

(d)

the specified securities issued under the share purchase plan or the unit purchase plan to security holders of the same class must enjoy the same rights -

(i)

as each other; and

(ii)

as the securities that qualify a security holder to subscribe for the specified securities; and

(e)

the subscription price must be less than the average market price of securities of the same class as the specified securities during a period specified in the share purchase plan or the unit purchase plan that falls within the period of 30 days immediately before either -

(i)

the date of the offer to subscribe for the specified securities; or

(ii)

the date of the issue of the specified securities; and

(f)

the subscription price must be fixed before allotment of the specified securities; and

(g)

the subscription price must be disclosed in accordance with clause 7(2) before allotment of the specified securities; and

(h)

in any 12-month period, the total issue price of the specified securities issued to a security holder must not be more than $5,000.
(2)

Despite subclause 1(h), the NZX issuer may issue to a custodian in any 12-month period specified securities the total issue price of which is more than $5,000 if -

(a)

the custodian certifies the following in writing to the NZX issuer -

(i)

that the custodian holds securities of the same class as the specified securities as a custodian for beneficial owners; and

(ii)

the number of those beneficial owners; and

(iii)

in respect of each of those beneficial owners, how many specified securities the custodian wants to accept; and

(iv)

that the custodian undertakes not to accept on behalf of any of those beneficial owners in any 12-month period specified securities the total issue price of which is more than $5,000; and

(b)

the NZX issuer is 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:

(i)

through any custodian(s); and/or

(ii)

if the beneficial owner is also a security holder, in their own right as a security holder.
6

Exemption from sections 37 and 37A of Act and Regulations (except regulation 8)
Every NZX issuer and every person acting on its behalf are exempted from sections 37 and 37A of the Act and the Regulations (except regulation 8) in respect of the specified securities.
7

Conditions of exemptions
(1)

The exemptions in clause 6 are subject to the condition that a person who subscribes for specified securities under a share purchase plan or a unit purchase plan must, before subscribing, have received a document that -

(a)

is signed by the directors of the NZX issuer; and

(b)

contains the offer to subscribe for specified securities under the share purchase plan or the unit purchase plan; and

(c)

describes the procedure for fixing the subscription price; and

(d)

specifies the subscription price if the subscription price was fixed before the document is sent to the person; and

(e)

states when the subscription price was or will be fixed; and

(f)

describes when and how payment of subscription monies is to be made; and

(g)

describes the relationship between the subscription price and the market price of the specified securities; and

(h)

warns that the market price may change between the date of the offer and the date when the specified securities are allotted, and describes the effect this would have on the price or value of the specified securities that a subscriber would receive; and

(i)

states that a subscriber may obtain -

(i)

in the case of a NZX issuer that is not the manager of a unit trust, the NZX issuer's most recent annual report and financial statements; and

(ii)

in the case of a NZX issuer that is the manager of a unit trust, the most recent annual report and financial statements of the unit trust,

from the NZX issuer free of charge.
(2)

The exemptions in clause 6 are subject to the further condition that -

(a)

in the case of the subscription price being fixed before the document referred to in subclause (1) is sent, the NZX issuer must, as soon as practicable after the document is sent, supply to NZX a statement that complies with subclause (3) for the purpose of that statement being made available to participants in the securities market operated by NZX upon which the specified securities are listed; or

(b)

in any other case, the NZX issuer must, as soon as practicable after the subscription price has been fixed, supply to NZX a statement that complies with subclause (3) for the purpose of that statement being made available to participants in the securities market operated by NZX upon which the specified securities are listed.
(3)

For the purposes of subclause (2), the statement must -

(a)

specify the subscription price; and

(b)

be signed by the directors of the NZX issuer; and

(c)

certify that when the subscription price was fixed the NZX issuer had no information not publicly available that would, or would be likely to, have a material effect on the realisable price of the specified securities if the information were publicly available.
(4)

The exemptions in clause 6 are subject to the further condition that the NZX issuer must not allot the specified securities if, when the subscription price was fixed, the NZX issuer had information not publicly available that would, or would be likely to, have a material effect on the realisable price of the specified securities if the information were publicly available.

Dated at Wellington this day of 2005.

The Common Seal of the Securities Commission was affixed in the presence of:

Chairperson.

Statement of reasons

This notice comes into force on the day after the date of its notification in the Gazette and expires on 30 June 2010.

The notice applies to the offer of specified securities by an NZX issuer under a qualifying share purchase plan or unit purchase plan. It exempts the NZX issuer, subject to conditions, from sections 37 and 37A of the Securities Act 1978 and from the Securities Regulations 1983 (other than regulation 8). One of the conditions of the exemptions is that the NZX issuer must provide investors with an offer document that contains details of the share purchase plan or the unit purchase plan.

The Securities Commission considers that it is appropriate to grant the exemptions because -

• the exemptions allow the NZX issuer to undertake limited fund-raising from existing shareholders or unit holders. The exemptions will reduce compliance costs for the NZX issuer and the offer will allow the shareholders or unit holders to purchase specified securities at a discounted price; and
• the exemptions are limited in the amount that can be raised from a shareholder or unit holder in any year, so that any significant fund-raising will require full offer documents. The exemptions allow custodians to accept, on behalf of beneficial owners, specified securities the total issue price of which is more than the maximum amount otherwise permitted under the exemptions. The conditions of the exemptions require certification by a custodian that no beneficial owner of shares or units will receive more than the individual limit permitted under the exemptions; and
• the conditions of the exemptions require that investors receive certain important information about the offer. As offers under the exemptions can be made only to existing shareholders or unit holders, and as the NZX issuer is subject to the continuous disclosure requirements of the Securities Markets Act 1988 and the NZX Listing Rules, investors will have access to key relevant information on which to base their investment decision.