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Feltex Crash Highlights Hole
In Overseas Investment Act, - by Sue Newberry and Bill Rosenberg We have two major questions arising from the collapse of Feltex in 2006 and the purchase of its assets by the Australian based Godfrey Hirst group. Firstly, did shareholders, creditors and employees get a fair deal? Secondly, did the Overseas Investment Act 2005 do the job expected of it to ensure scrutiny of Godfrey Hirst’s acquisition? Our concerns regarding the fairness of the deals done following the collapse of Feltex are raised by information in the documents recently released under an official information request to the Overseas Investment Office (OIO) by the Campaign Against Foreign Control of Aotearoa (CAFCA). They revealed that everything was not quite in keeping with public impressions. When the ANZ appointed receivers for Feltex in September 2006, it removed from Feltex’s shareholders and directors their ability to decide on the fate of Feltex. This event brought to an end an alternative bid for Feltex’s shares that the Feltex directors were recommending. A receiver acts in the interest of the major creditor that appoints it, in this case the ANZ. The ANZ was owed in the vicinity of $135 million and, according to the receivers, would have lost money had it not acted. The receiver sold the Feltex business and assets, thus recovering the ANZ’s funds but leaving Feltex’s shareholders with worthless shares in an empty shell, and creditors and employees considerably out of pocket. Their losses have amounted to at least $250 million since the company was floated in 2004. That empty shell is now in the hands of a liquidator, whose role is to act in the interests of those stakeholders. It was inevitable the ANZ would be criticised for its actions. What further increased suspicions that it was acting solely in its own interests was well informed assertions that it negotiated with interests acting for Godfrey Hirst after Godfrey Hirst withdrew from negotiations with Feltex, and before the ANZ appointed the receiver. Even Feltex made that comment in its media announcement of the receivership: “As previously announced Godfrey Hirst withdrew from negotiations with the Company on September 5 (2006). We have since been advised that Godfrey Hirst made an offer directly to the ANZ Bank after that date”. If correct, it would imply that other Feltex stakeholders never had a chance of getting a better deal even if one was on offer. The ANZ had also increased the pressure on Feltex by withdrawing credit lines. The ANZ denies this version of events, but has not done its own case any good. Feltex’s liquidator has commented on the ANZ’s reluctance to provide information requested. This led to the Shareholders’ Association awarding the bank its Golden Glob Award in October 2007 for “not behaving appropriately” towards the liquidator. Publicly, much was made of claims that Feltex was sold to Godfrey Hirst as a going concern. In fact, the documents released from the OIO showed that was not the whole story. Two Feltex plants in Manawatu –at Kakariki near Marton and at Foxton – were not sold to Godfrey Hirst at all, they were sold to its Chairman and Chief Executive, Rudyard McKendrick. He clearly has profited by up to $100,000 from the prompt on-sale of the Kakariki property. He also appears to have acquired the Foxton property at a bargain price: it was purchased by Feltex in 2004 for $4.8 million according the company’s financial reports. McKendrick bought it for $3.85 million. Deliberately Planned Break Up Of Feltex The sale of these assets to McKendrick implies a break-up of Feltex rather than the claimed sale as a going concern. This was deliberately planned: the special purpose companies for it were incorporated weeks before receivership actually occurred. It also raises questions about the potential prices of Feltex’s assets had the receivers sold some on a break-up basis. Potentially, had higher prices been obtained on this basis it might have left some money for Feltex’s creditors and staff, if not its shareholders. As it was, Feltex’s creditors and shareholders missed out, and at least some of the profits have gone to McKendrick. The sale of Feltex’s business and assets also raises questions about the operation of the Overseas Investment Act 2005, and whether the act requires further attention. The stated purpose of the Act is to require overseas investments to meet specific criteria before consent is granted and to impose conditions on overseas investments as a means of acknowledging that it is a privilege for overseas investors to invest in sensitive New Zealand assets. Consent is required for an overseas investment in sensitive land, and for an overseas investment in significant business assets. In the case of Feltex, the Kakariki and Foxton properties were sensitive land, while the international Feltex group was a significant business. Godfrey Hirst and its deal maker, Chapman Tripp, claimed that the sale of the business did not require consent under the Overseas Investment Act. Godfrey Hirst was clearly an overseas investor and, if the sale of the overall business is considered then it clearly exceeded the $100 million threshold for “significant business assets”. We know from the OIO documents and information provided to the Press by Godfrey Hirst that it paid approximately $134 million for Feltex’s assets. Section 13 of the Overseas Investment Act gives two circumstances under which this kind of acquisition requires OIO scrutiny. If Feltex had been acquired through purchase of its shares or other securities, then the price for the entire company ($134 million) would have been counted, and the purchase would have been subject to the Act. Alternatively, if (as in fact happened) Feltex’s assets were acquired leaving the company’s shares in their original hands, it seems that only the New Zealand assets are counted (A$52 million) and it escapes scrutiny. This loophole is available to investors wishing to avoid scrutiny, and may even encourage potential investors to try to cause such circumstances. Splitting Off Sensitive Land However, even if the sale had come under OIO scrutiny under the sensitive business assets provision, the criteria for approval are exceptionally weak, and to our knowledge have never been used to reject a business acquisition. What is more crucial is the two properties at Kakariki and Foxton that were on sensitive land. The criteria for sensitive land acquisition by overseas investors are considerably more stringent than for other business assets, and we are aware of these provisions being used to refuse applications seven times since the Act came into force in August 2005. If these properties had been included with the other assets sold to Godfrey Hirst, as would be expected in a sale of a “going concern” then the purchase of at least the New Zealand part of the business would have been subject to those more stringent criteria. Rejection would then be a possibility, particularly in light of the high degree of public concern (which was noted by the OIO itself in the released documents). Godfrey Hirst admits that one of its reasons for splitting out the two properties was to allow the main deal to be settled sooner by avoiding OIO scrutiny. The OIO papers show Godfrey Hirst’s deal maker, Chapman Tripp, was repeatedly (and as recently as July 2007) at pains to clarify with the OIO that the structure it had set up did not require OIO approval beyond the two sensitive land properties. Whatever their motivations, we are concerned that allowing overseas investors to split off sensitive land in this way is a major loophole in the Act. It allows investors to pick and choose how much of significant and sensitive assets are subject to the Act’s provisions. A current example, in which there is speculation that these same “sensitive land” provisions may be used to stop an unpopular takeover by overseas interests of a much broader business, is that of Auckland International Airport (see Quentin Findlay’s article elsewhere in this issue on the attempts to sell Auckland Airport overseas. Ed.). It would not be difficult to construct a use of the loophole to avoid that scrutiny. It is always possible with new legislation that particular situations highlight unintended consequences and the need for further reconsideration. We believe that this is one of them. This is an updated version of the article by Sue Newberry and Bill Rosenberg that was published in the Press (12/10/07) titled “Firm’s collapse raises questions”. Ed. Non-Members:
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