NZS - Application for Waiver from Listing Rule 9.2.1

NZ Farming Systems Uruguay Limited Ordinary Shares | 10:06 am, 28 Oct

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NZS - Application for Waiver from Listing Rule 9.2.1

28 October 2009

NZX Regulation Decision
NZ Farming Systems Uruguay Limited
Application for Waiver from Listing Rule 9.2.1


Background

1. NZ Farming Systems Uruguay Limited (“NZS”) is an Issuer with ordinary shares Quoted on the NZSX market. In this waiver decision capitalised terms which are not otherwise defined have the meanings given to them in the NZSX Listing Rules (“Rule”).

2. On 3 November 2006, NZS entered into a management agreement (“Management Agreement”) with PGG Wrightson Funds Management Limited (“Manager”), pursuant to which the Manager was appointed to provide asset management and investor relations services to NZS.

3. PGG Wrightson Limited (“PGW”) is a substantial security holder holding a non-beneficial interest in 15.62% of the shares in NZS, and is therefore a holder of a Relevant Interest in 10% or more of NZS’ shares for the purposes of Rule 9.2.3(b). The Manager, as a wholly-owned subsidiary of PGW, is an Associated Person of
PGW under Rule 1.8, and therefore a Related Party of NZS pursuant to Rule 9.2.3(c).

4. The term of the Management Agreement is five years from the allotment of shares under NZS’s initial public offering, i.e. 15 December 2011. Following expiry of the five year term either party may terminate the Management Agreement by giving three years’ written notice. Accordingly, the earliest the Management
Agreement can be terminated, other than for breach or insolvency, is 15 December 2014.

5. The Management Agreement provides for a management fee of 1.5% per annum based on the gross asset value of NZS (excluding any cash deposits held as security for borrowings of the NZS) until 30 June 2008, thereafter reducing to 1.0% per annum (“Management Fee”). The gross asset value of NZS is calculated by the Manager in accordance with generally accepted accounting standards (based on the market value of the farm assets which are subject to revaluation each year).

6. In addition the Management Agreement provides for payments of a performance fee calculated as 20% of the amount by which the investor return exceeds 10% (“Performance Fee”). The investor return is the total gross distributions paid for the year expressed as a percentage of the share price at the beginning of that year, plus the percentage change from the average June quarter market price of a share from year to year (“Investor
Return”). If the Investor Return significantly exceeds 10% and the compounded target is also significantly exceeded, a substantial Performance Fee payment to the Manager will result.

7. On listing NZS wished to have the option to pay either the Management Fee or Performance Fee, or both, by the issue of ordinary shares in NZS. Accordingly, NZS obtained shareholder approval to issue shares pursuant to the Management Agreement at its annual meeting held on 31 October 2007, in accordance with
Rule 7.3.1(a).

8. In February 2008, NZS was granted a waiver by NZX Regulation from the provisions of Rule 7.3.2(b) to permit NZS to continue paying either the Management Fee or the Performance Fee by an issue of ordinary shares without requiring further shareholder approval for a period of three years ending on 15 December
2009 (“Existing Waiver”). To date, no shares have been issued in payment of the Performance Fee or Management Fee under the Management Agreement.

9. The Manager entered into a separate farm management agreement with its related company PGG Wrightson Uruguay Limited (“Farm Manager”) under which the Manager delegated to the Farm Manager obligations to operationally manage, and facilitate the strategic development of, the farm assets of NZS (“Farm
Management Agreement”).

10. Following discussions with various institutional shareholders of NZS about the terms of the Management Agreement, the independent directors of NZS (John Roadley, Graeme Wong and John Parker (“Independent Directors”)) have negotiated with the Manager an amended management agreement by way of certain
changes made to the material terms of the Management Agreement (“Amended Management Agreement”). NZS asserts that the changes are favourable to shareholders in NZS not related to PGW or the Manager. The material changes to the Management Agreement contained in the Amended Management Agreement, as
provided to NZXR by NZS, are:
(a) The Management Agreement and the underlying Farm Management Agreement between the Manager and the Farm Manager have been merged. The Farm Manager will continue to provide the farm
management services. However, the Manager will now have direct responsibility to NZS for procuring the delivery of those services.
(b) The obligations of the Farm Manager under the Farm Management Agreement have been incorporated into the Amended Management Agreement.
(c) The Management Fee percentage will reduce from 1.0% per annum to 0.75% per annum for gross assets above $US400 million.
(d) The Management Fee in relation to land sold through a proposed sale and leaseback programme will be reduced from 1.0% per annum (or 0.75% per annum, as the case may be) to 0.5% per annum, provided that such reduction will only apply to land actually sold and leased back by NZS.
(e) Subject to applicable approvals (which may include a shareholders resolution pursuant to Rule 7.3.1), NZS can choose to pay the Manager, without the agreement of the Manager, in shares instead of cash for any future Performance Fee payments (i.e., for future performance beyond the Performance Fee
currently outstanding). Currently, this decision can only be by agreement between NZS and the Manager.
(f) The power of the Manager to charge an additional margin on the provision of farm management services has been removed. While no margin has been charged to date, NZS now has certainty in
relation to the potential for incurring additional charges for the farm management services.
(g) A management performance review mechanism has been included to ensure that the Manager
manages NZS in accordance with agreed targets and key performance indicators. There is currently no formal performance review mechanism provided for in the Management Agreement.
(h) The terms of the Farm Management Agreement and the Management Agreement have been brought into alignment in the Amended Management Agreement i.e., the Amended Management Agreement
can be terminated on three years written notice from 15 December 2011. Accordingly the earliest the Amended Management Agreement (including appointment of the Farm Manager) can be terminated
for convenience is 15 December 2014.

11. At present, the Average Capitalisation of NZS is $112.3 million. During the past year the Management Fee and cost recovery was US$4 million. Pursuant to Rule 9.2.2, the Amended Management Agreement is a Material Transaction as the actual gross cost to NZS of the Management Fee and any Performance Fee is likely to exceed 1% of the Average Market Capitalisation of NZS. As outlined in paragraph 3, above, the Manager is a Related Party of NZS.

12. Rule 9.2.1 prohibits NZS from entering into a Material Transaction with a Related Party without prior
shareholder approval.


Application

13. NZS has approached NZX Regulation (“NZXR”) seeking a waiver from the requirement in Rule 9.2.1 that NZS seek shareholder approval to enter into the Amended Management Agreement with the Manager.

14. NZS makes the following submissions in support of its application, in relation to the Amended Management
Agreement:
(a) The Amended Management Agreement has been negotiated on arm’s length and commercial terms that are more favourable to NZS and its shareholders than those contained in the Management
Agreement. PGW has not influenced the decision of NZS to amend the Management Agreement and that there are no other transactions or factors that relate to the Manager’s preparedness to enter into the Amended Management Agreement of which NZS is aware.
(b) The Independent Directors of NZS are prepared to provide a certificate to NZX confirming that in their opinion:
(i) The terms of the Amended Management Agreement were negotiated on an arm’s length and commercial basis;
(ii) The terms of the Amended Management Agreement are fair and in the best interests of NZS shareholders that are not associated with PGW; and
(iii) The directors of NZS which are associated with PGW did not influence the promotion of the proposal to enter into the Amended Management Agreement.
(d) The Existing Waiver expires on 15 December 2009, and therefore no shares can be issued to the Manager in lieu of the Performance Fee or Management Fee after this date unless NZS requires it and shareholder approval is obtained in compliance with Rule 7.3.1. No issue of shares will be made under
the Management Agreement before that date.
(e) The value of payments of any Performance Fee and the Management Fee under the Amended Management Agreement are likely to exceed 1% of NZS’ Average Market Capitalisation. However,
the value of any shares issued for a future Performance Fee is unlikely to have a market value of in excess of 10% of NZS’ Average Market Capitalisation. In any event, as noted above, compliance with the Rules and all relevant law is required before such an issue can take place.
(f) Given the proximity of NZS’ shareholder meeting (which took place on 15 October 2009) to the
waiver application, seeking shareholder approval for entry into the Amended Management Agreement was not possible. If a waiver was not granted, the less favourable terms of the the Management
Agreement would continue to apply to the relationship between NZS and the Manager until the next shareholders’ meeting.
(g) NZS would have liked to put the Amended Management Agreement to a vote of NZS shareholders. However, the terms of Amended Management Agreement had only been finalised a few days prior to
NZS’ annual shareholder meeting, and after the notice of meeting for the AGM had already been sent to shareholders in compliance with the schedule to the Companies Act 1993.


Rules 1.3 and 9.2

15. Rule 1.3 provides:
1.8 ASSOCIATED PERSONS
1.8.1 Associated Persons: In the Rules, a person is an Associated Person of another person if the first person is associated with the other person in terms of Rules 1.3.2
to 1.3.6.
...
1.8.3 Deeming Provisions: Without limiting Rule 1.3.2, the first person is associated with the second person if:
...
(c) the first person is a Director of a company, or holds a Relevant Interest in Securities
carrying more than 10% of the Votes of a company and the first person and the second person are parties to an Arrangement relating to the control of, or the control or ownership of Securities in, that company, which Arrangement affects Securities
of that company carrying more than 30% of the total Votes attaching to Securities of that company; or

16. The relevant parts of, and the footnote to, Rule 9.2.1 provide:
9.2 TRANSACTIONS WITH RELATED PARTIES
9.2.1 Restriction: An Issuer shall not enter into a Material Transaction if a Related Party
is, or is likely to become:
(a) a direct or indirect party to the Material Transaction, or to at least one of a related series of transactions of which the Material Transaction forms part; or
...
unless that Material Transaction is approved by an Ordinary Resolution of the Issuer.
1. NZX may waive the requirement to obtain the approval of a resolution for the purposes of Rule 9.2.1 if it is satisfied that the personal connections with, or involvement or personal interest of a Related Party are immaterial or plainly unlikely to have influenced the promotion of the proposal to enter into the transaction or its terms and conditions.
17. The relevant parts of Rule 9.2.3 provide:
NZX Regulation Decision - NZ Farming Systems Uruguay Limited
Application for waiver from NZSX Listing Rule 9.2.1
Definition of Related Party: For the purposes of Rule 9.2.1, “Related Party” means a person
who is at the time of a Material Transaction, or was at any time within six months before a
Material Transaction:
...
(b) the holder of a Relevant Interest in 10% or more of a Class of Equity Securities of the Issuer carrying votes;
(c) an Associated Person of the Issuer or any of the persons referred to in (a) or (b), other than a person who becomes an Associated Person as a consequence of the Material Transaction itself (or an intention or proposal to enter into the Material
Transaction itself); or
…


Decision
18. On the basis that the information provided to NZXR is full and accurate in all material respects, NZXR grants NZS a waiver from the restriction in Rule 9.2.1, prohibiting an Issuer from entering into a Material Transaction with a Related Party without shareholder approval, to allow NZS to enter into the Amended
Management Agreement, on the following conditions:
(a) All of the Independent Directors of NZS sign a certificate, in a form acceptable to NZXR, that in the
opinion of the Independent Directors:
(i) the terms of the Amended Management Agreement were negotiated on an arm’s length and commercial basis;
(ii) the terms of the Amended Management Agreement are fair and in the best interests of NZS shareholders that are not associated with PGW;
(iii) that the terms of the Amended Management Agreement are more favourable to NZS shareholders not associated with PGW than the terms of the Management Agreement; and
(iv) the directors of NZS which are associated with PGW did not influence the promotion of the
proposal to enter into the Amended Management Agreement.
(b) That the material terms of the agreement are released in the next annual and half yearly reports of
NZS, including a summary of the cost savings for NZS directly attributable to the Amended
Management Agreement compared to costs if the Management Agreement had remained in the force.
(c) Any material amendments to the Amended Management Agreement, as the agreement stands at the date of this decision, must be approved by NZS shareholders pursuant to Rule 9.2.1 (unless NZX
agrees otherwise).


Reasons

19. In coming to the decision to grant NZS a waiver in respect of Rule 9.2.1, NZXR has considered:
(a) The policy behind Rule 9.2.1 is to ensure that the Related Parties do not exercise undue influence or
personal connections to reach a favourable outcome or a transfer of value to the Related Party in respect of a transaction and that shareholders are given an opportunity to review transactions where the board may have been subject to actual or perceived influence from a Related Party;
(b) In circumstances where NZXR can be satisfied that the Related Party (or its associated directors, if any) did not materially influence the decision to enter into the proposed arrangement, and that there is evidence (usually certification from the directors) that the arrangements were entered into on an arm’s
length basis and are in the best interests of the company, then NZXR will waive the requirement to obtain shareholder approval.
(c) The certification by the Independent Directors, that the directors of NZS which are associated with PGW did not influence the promotion of the proposal to enter into the Amended Management Agreement, provides comfort to shareholders that the negotiation of, and entry into, the Amendment Management Agreement was not influenced by the Related Party nexus between the Manager and NZS.
(d) The Independent Directors of NZS have certified that the terms of the Amended Management Agreement are fair and in the best interests of NZS shareholders that are not associated with PGW.
The policy underlying Rule 9.2.1 is to prevent unfair value transfer to a Related Party at shareholders’ expense. NZS asserts, and NZXR has no reason not to believe, that the changes made to the Management Agreement are of benefit to all shareholders of NZS. Granting the waiver meets the
policy of Rule 9.2.1.
(e) NZS has informed NZXR, and NZXR has no reason not to believe, that the negotiations were entered into at the request of shareholders of NZS in order to seek more favourable terms for the provision of management and farm management services. If a waiver were not to be granted, shareholders would not receive the benefit of the more favourable terms of the Amended Management Agreement until shareholders voted to accept the Amended Management Agreement at the next shareholder meeting in
October 2010.
(f) NZXR notes that the amendment to the material terms of an existing agreement with a Related Party that was at the time of entry a Material Transaction, will in most instances constitute entry into a Material Transaction with a Related Party for the purposes of Rule 9.2.1. Whether or not a new Material Transaction is being entered into depends on the materiality of the terms being amended taken in the context of the transaction as a whole.
Publication

20. No application has been made with regards to the confidentiality of this decision and the decision will be
published in accordance with Rule 1.11.2.

ENDS.