RAK
16/08/2013 12:17
WAV/RULE
REL: 1217 HRS Rakon Limited
WAV/RULE: RAK: RAK Application for Waiver from NZSX Listing Rule 9.1.1(b)
16 August 2013
NZX Regulation Decision
Rakon Limited
Application for Waiver from NZSX Listing Rule 9.1.1(b)
Background
1. Rakon Limited ("RAK") is a listed issuer with ordinary shares quoted on
the NZSX main board.
2. RAK has entered into a Cooperation Framework Agreement with ZheJiang East
Crystal Electronic Co. Ltd ("ECEC") under which the parties are to establish
a strategic partnership targeting the smart wireless device market.
3. Under the Cooperation Framework Agreement, it is proposed that ECEC will
acquire from RAK 80% of the shares in Rakon Crystal (Chengu) Co. Limited
("RCC"), the owner of a manufacturing facility in Chengdu, China for U.S
$18.8 million (at prevailing exchange rates, approximately, N.Z $24 million)
(the "Transaction").
4. RAK announced the terms of the proposed Transaction to the market on 5
July 2013.
5. The volume weighted average market capitalization of RAK's ordinary shares
from trades on the NZX over the 20 business days prior to announcing the
Transaction on 5 July 2013 was approximately $37.46 million ("Average Market
Capitalisation"). Accordingly, the gross value of the proposed Transaction
exceeds 50% of the Average Market Capitalisation of RAK at the time of
announcing the Transaction and therefore the Transaction requires shareholder
approval in accordance with NZSX Listing Rule 9.1.1(b) ("Rule 9.1.1 (b)")
Application
6. On 15 July 2013 RAK applied to NZX Regulation ("NZXR") for a waiver from
Rule 9.1.1 (b) to enable RAK to enter into the proposed Transaction without
seeking shareholder approval.
7. In support of its application RAK makes the following submissions:
(a) Average Market Capitalisation may not always be the appropriate benchmark
for determining whether transactions should require shareholder approval. In
RAK's case:
i. the value of the Transaction represents approximately 10% of RAK's total
assets (the value of which was N.Z.$240.5 million as at 31 March 2013 (being
the date of RAK's most recent audited financial statements));
ii. RAK's share price has fallen significantly over the last 12 months. In
particular, RAK's share price has fallen by more than 36% over the last six
months and by more than 50% over the last 12 months. Were RAK's Average
Market Capitalisation to be calculated by reference to any period ending
prior to 13 February 2013, the Transaction would not come within the scope of
paragraph (b) of NZSX Listing Rule 9.1.1; and
iii. RAK's share price trades at a significant discount to its net tangible
assets per share. For example, RAK's net tangible assets per share calculated
by reference to its total assets as at 31 March 2013 is N.Z.$0.69 per share.
This contrasts with RAK's share price as at 28 March 2013 (being the last
business day of March 2013) of N.Z.$0.24 per share, and RAK's share price as
at 15 July 2013 of N.Z.$0.24 per share. RAK's market capitalization based on
a share price of 24 cents per share is N.Z.$45.8 million.
(b) The major transaction provisions of the Companies Act 1993 (the
"Companies Act") provide that transactions that exceed 50% of the value of
RAK's assets must be approved by a special resolution of shareholders, or be
contingent upon such approval. This requirement cannot be waived.
Accordingly, shareholders are afforded the protections of the Companies Act
for transactions that are significant compared to the value of RAK's assets,
and will have the opportunity to vote on these transactions. In this
instance, the Transaction does not trigger this requirement and shareholder
approval is not required by the Companies Act. The value of the transaction
represents approximately 10% of RAK's assets as at 31 March 2013.
(c) The board of directors of RAK unanimously resolved to approve entry into
the Framework Cooperation Agreement, including the terms in that agreement
relating to the proposed Transaction.
(d) The board of directors of RAK hold, in aggregate, a beneficial interest
in a significant number of RAK shares. In particular, and as at 15 July 2013,
the board of directors of RAK hold, in aggregate, a beneficial interest in
approximately 30% of issued RAK shares (excluding any RAK shares issued, but
unvested, under any employee share schemes). Accordingly, even if shareholder
approval were required, only approximately 20% of the remaining 70%
non-director RAK shareholders would be required to approve the Transaction.
(e) The alternative would be for RAK to convene a meeting to approve the
Transaction. There are practicality difficulties in doing so in the context
of the proposed Transaction timetable. In particular:
i. it is not practicable to seek shareholder approval now (i.e., ahead of
signing a Sale and Purchase Agreement) as the terms of the Transaction are
not sufficiently detailed;
ii. it is unlikely to be possible to seek shareholder approval at RAK's
Annual General Meeting (set for 6 September 2013) after signing, since the
anticipated signing date may be as late as 10 September 2013; and
iii. if RAK were required to seek shareholder approval after signing by
calling, and holding, a special meeting of shareholders, there is a
significant risk that, given the documentary requirements of NZSX Listing
Rule 9.1.2, the Transaction would not complete by 30 September 2013 (such
date being the latest date on which settlement under the Sale and Purchase
Agreement is to occur). A request by RAK to extend the completion date and to
include a shareholder approval condition to the Sale and Purchase Agreement
could be looked upon unfavourably by ECEC with a potentially significant risk
that RAK could lose the opportunity to sign a Sale and Purchase Agreement and
execute the Transaction. As previously announced, the board has a plan to
reduce debt to less than N.Z.$15 million by the end of the 2014 financial
year. The ability to use proceeds from the Transaction to retire debt is
material in the context of achieving that objective.
(f) If shareholder approval is not obtained by RAK, the RAK board is likely
to decide to close the Chengdu plant to liquidate the assets of Rakon Crystal
(Chengdu) Co. Limited.
Rules
8. Rule 9.1.1 provides that:
An Issuer shall not (subject to Rule 9.1.3) enter into any transaction or
series of linked or related transactions to acquire, sell, lease, exchange,
or otherwise dispose of (otherwise than by way of charge) assets of the
Issuer or assets to be held by the Issuer:
(a) which would change the essential nature of the business of the Issuer;
or
(b) in respect of which the gross value is in excess of 50% of the Average
Market Capitalisation of the Issuer;
except with the prior approval of an Ordinary Resolution of the Issuer or a
special resolution if that Issuer must obtain approval of the transaction or
transactions by a special resolution under section 129 of the Companies Act
1993.
9. Footnote 3 to Rule 9.1.1 provides that:
NZX may waive application of Rule 9.1 where, due to deterioration in the
financial position of the Issuer, the Average Market Capitalisation of the
Issuer has reduced to such an extent that the Rule imposes an unreasonable
restriction on the ability of the Issuer to realise assets.
Decision
10. On the basis that the information provided to NZXR is full and accurate
in all material respects, NZXR declines to grant RAK a waiver from Rule 9.1.1
(b).
Reasons
11. In coming to this decision, NZXR has considered the following matters: ?
(a) The policy intention behind Rule 9.1.1 (b) is to ensure that shareholders
have visibility and oversight of transactions that constitute major decisions
for an issuer. Accordingly, the requirement for shareholder approval of major
transactions is an important shareholder protection;
(b) The obligation to obtain shareholder approval under Rule 9.1.1 (b) is
independent of any obligation to obtain shareholder approval under the
Companies Act;
(c) NZXR considers that RAK has provided insufficient reasons to support the
granting of the waiver sought. In particular, RAK has not established that
the requirement to obtain shareholder approval would impose an unreasonable
restriction on its ability to conclude the proposed Transaction. Further, RAK
has indicated that it is able to seek shareholder approval for the proposed
Transaction;
(d) NZXR expects issuers to structure transactions in a manner that ensures
they can comply with the rules and, if required, seek shareholder approval
whenever possible. Issuers should keep abreast of changes to their Average
Market Capitalisation in order to understand their impact and plan
accordingly. In this instance, the structure of the transaction and the
timetable is within RAK's control;
(e) NZXR considers that Footnote 3 to Rule 9.1.1 applies in circumstances
where deterioration in an issuer's financial position has resulted in a rapid
reduction in its Average Market Capitalisation, which then imposes an
unreasonable restriction on the issuer's ability to realise assets. In this
case, RAK's Average Market Capitalisation has not reduced materially over
recent months.
ENDS.
End CA:00239805 For:RAK Type:WAV/RULE Time:2013-08-16 12:17:14
