NZ Shareholders Assn AGM Speech - Paul Swain
2 July, 2002
Hon Paul Swain
NZ Shareholders Assn AGM Speech
Good afternoon and thank you for the invitation to speak here today. The Government is determined to get New Zealand back into the top half of the OECD. Making sure that our securities markets can attract sufficient investment will be critical in helping us to achieve this goal. If that is to happen small investors, like yourselves, must have the confidence to invest their money in kiwi companies. Clearly the level of protection for small investors has not been good enough. The hands-off approach of previous governments has simply not delivered. This government has already gone some way towards fixing the problem with the new Takeovers Code introduced last year, and we have more legislation coming up. Today I’d like to talk about the securities law reform programme in more detail and demonstrate to you that the government is serious about promoting confidence in New Zealand’s securities markets.
There are a number of risks that investors,
particularly minority investors, face in securities markets.
These risks include:
- misleading and/or poor quality information about the value of a business which leads to the shares of that business being over-priced;
- self-dealing transactions - the diversion of the assets of a business to its insiders;
- insider trading, with the result that anticipated gains in the value of the business are diverted to insiders, systematically skewering returns in favour of the insiders.
These risks can be very significant and it is vital that we have the appropriate laws and institutions in place to minimise them.
Stanford University’s Professor Bernard Black has argued that there are two essential requirements for strong securities markets. These are that a country’s laws and related institutions must give minority shareholders:
- good information about the value
of a company’s business; and
- confidence that the company’s insiders won’t cheat investors out of the value of their investment through self-dealing transactions.
The Government has paid special attention to these areas in its programme of securities law reform. There are three parts to the programme - The Takeovers Code, which came into effect last July, the Securities Markets and Institutions Bill, which has been through the select committee and is now back before parliament and a fundamental review of securities trading laws, especially our insider trading laws. The reform programme is designed to ensure that the regulations governing our market are efficient and effective. We also want to reassure both international and domestic investors that the New Zealand market is a market of integrity and is in line with international best practice.
The first part of the Government’s reform programme was completed last year with the introduction of the Takeovers Code.
The Code has two key objectives. The first is to align our takeovers regime with international best practice giving international and domestic investors greater confidence in our market. The second is to give greater confidence to small and minority investors by providing them with fair and equal treatment and participation in takeovers.
The second objective is achieved by prohibiting
a shareholder from increasing their voting rights in a
company above the 20% threshold, unless done in compliance
with the code.
One of the critical issues here is that all shareholders get treated equally which means that everyone must receive the same offer.
In the brief time that the Code has been in force it has achieved its objectives. Industry feedback has generally been favourable. In fact, many who were originally opposed to the Code now support it.
All prospective takeover offers must now comply with the code and adhere to its core concepts of fair and equal treatment and participation by all shareholders. By requiring an offer to remain open to all shareholders equally and for a specified time, the Code has removed some of the urgency seen in takeovers of old, where shareholders were coerced by brokers into selling out at a lightning pace for fear of missing out on the deal. Shareholders, led by fund managers, are now taking the time to consider offers and wait for competing bids to emerge.
Edison Mission’s bid for Contact Energy is a good example. Edison was forced to up its offer and extend the deadline on acceptances in the face of strong opposition to its bid. Although unsuccessful, it is a good example of the new regime’s requirement to treat all shareholders fairly and equally.
Perceptions of the New Zealand market in regard to takeovers have been greatly improved and shareholders now feel that they have greater rights in a takeover situation.
Securities Markets and Institutions Bill
The second part of the government’s reform programme is well underway with the Securities Markets and Institutions Bill currently before the House, awaiting its second reading.
Public submissions showed that aspects of our current securities law, particularly the prevention, detection and enforcement of insider trading, are widely perceived as not working effectively. Submissions also showed that the Securities Commission and the Takeovers Panel do not have the necessary or most appropriate powers to ensure the law is effectively implemented. Finally, our current securities law is not consistent with international norms in many areas. This is particularly the case for continuous disclosure and the regulatory environment for securities exchanges. The trend towards increasing international coordination of financial market regulation, means that being different imposes a significant cost.
The SMI Bill was developed in order to address these concerns. The objective of the Bill is to increase the effectiveness and the efficiency of the law governing securities markets and regulatory institutions and to bring it in line with the laws in foreign markets.
Australian law has been used as a starting point in a number of areas of the Bill, but we are not just copying Australian law for the sake of it. Consistency with Australia means that investors who understand and have confidence in the Australian regime will also have confidence in the New Zealand regime. The Australian system is consistent with international best practice and because of the increasing linkages between the two economies, it makes sense to have similar regimes.
It has been suggested that we should instead be following the US model. I want to point out to you today that the US is currently reviewing its regime and looks set to adopt something similar to the Australian approach.
The Bill contains a number of reforms designed to protect shareholders from insider trading and to provide information to investors about the company they are investing in.
It implements a continuous disclosure regime that provides statutory backing of exchange listing rules and some guidance to the test for disclosure in the legislation. The aim of the regime is to require timely disclosure by companies of material information and to provide remedies where a public issuer breaches the obligation. This will help investors to make informed investment decisions and will encourage them to have confidence in the integrity of the market by helping to counter insider trading, the creation of false markets and the distortion of the market through rumours.
In addition the Bill places obligations on directors and officers to disclose securities dealings when they occur. More open and immediate disclosure of the securities dealings of directors and officers will help the monitoring of insider trades and be a deterrent to insider trading as the dates of the trades can be checked against the dates at which the disclosure entered the public domain.
Finally the Bill sets the Securities Commission up as a civil enforcement body for insider trading and continuous disclosure. Giving the Securities Commission this power will act as a deterrent to breaches of insider trading and the continuous disclosure regime. It will also lead to greater enforcement of the rights of investors because, unlike a private individual, the Commission will have the powers to obtain information relevant to the insider trading action and will not be dissuaded by the time or costs involved in bringing an action. This year’s Budget gave the Commission an extra $1.3 million, and established an $844,000 litigation fund to help the Commission in carrying out its new functions.
Review of securities trading laws
The third part of the Government’s reform programme is currently in progress. Three discussion documents were released in May and represent a fundamental review of securities trading laws. These documents consider:
first principles review of insider trading law, which
examines the various policy justifications for implementing
insider trading regulation and explores how the content of
an insider trading regime could best meet and promote these
- a review of market manipulation law in New Zealand, which looks at whether more substantive laws to prevent market manipulation should be implemented and, if so, what forms of market manipulation should be prohibited; and
- a consideration of which financial products and entities New Zealand securities trading law should apply to, what improvements could be made to civil and administrative remedies and whether criminal and civil penalties regimes should be introduced.
The policy proposals resulting from this review will ensure that our law more effectively prohibits insider trading and market manipulation. Investors must be reassured that the gains to be made from investing in the market are not limited to insiders.
The Securities Commission has also recently made recommendations to the Government regarding the law relating to investment advisers. The Investment Advisers (Disclosure) Act 1996 aims to ensure that people have access to sufficient information about the advisers they deal with to make an informed decision whether to ask them for investment advice and whether to rely on the advice received.
Officials from the Ministry of Economic Development have been given background information about the recommendations and will report on issues relating to investment advisers after the new government is formed.
This is just a
brief summary of the Government’s vision for the reform of
New Zealand’s securities markets. Protections and rights for
investors have been undermined in the past securities law
environment and we are determined to remedy the situation. I
encourage you to voice your views and make a submission on
the fundamental review of securities trading law discussion
I hope you’ll agree that this government is doing more to build confidence in New Zealand’s securities markets and provide protection for small investors than any other government in recent memory.