ALF
23/08/2013 12:14
WAV/RULE
REL: 1214 HRS Allied Farmers Limited
WAV/RULE: ALF: ALF - Application for a Waiver from NZSX Listing Rule 9.2.1
NZX Regulation Decision
Allied Farmers Limited (ALF)
Application for waiver from Listing Rule
9.2.1
22 August 2013
Background
1. Allied Farmers Limited ("ALF") is a Listed Issuer with ordinary shares
quoted on the NZX Main Board.
2. ALF has operated a bobby calf business since 2001 which involves the
purchase of bobby calves from farmers, contracted processing, and on-sale of
products. Following a re-structure, the bobby calf business is now operated
by ALF's partly-owned subsidiary, NZ Farmers Livestock Limited ("NZFL"). NZFL
operates the business through its subsidiary Farmers Meat Export Limited
("FMEL").
3. To assist with funding the bobby calf business for the 2013 and 2014
seasons, FMEL is seeking to enter into a working-capital facility for not
more than $1.5 million per annum with Garry Bluett and another funder who is
not a Related Party (as joint lenders) (the "Loan"). Mr Bluett's proportion
of the joint lending will be 15 per cent or less. The purpose of the Loan is
to fund the working capital of FMEL, which is required to purchase inventory
(being bobby calves) and cover costs related to such inventory.
4. The Loan will include the following principal terms:
(a) Security by way of a charge over the product inventories. No other
security or guarantees will be provided by ALF or any other company in the
ALF group;
(b) The funders may advance funding of up to an additional $1.5 million for
the 2014 season provided that the 2013 season funding plus interest and costs
have been fully repaid (the intention being that the liability to the funders
will not at any one time exceed $1.5 million plus interest and costs);
(c) Interest of 10.9% per annum, payable monthly in arrears;
(d) Default interest of 17% per annum;
(e) Loan funds advanced for the 2013 season will be repayable by 31 December
2013; and
(f) Loan funds advanced for the 2014 season will be repayable by 31 December
2014.
5. Garry Bluett is a director of ALF, and is, therefore, a Related Party of
ALF pursuant to NZSX Listing Rule ("Rule") 9.2.3(a).
6. Rule 1.6.6 extends the definition of Issuer to include, as the context
permits, all members of any group of companies of which the Issuer is the
holding company or otherwise has a controlling interest. FMEL is a subsidiary
of ALF as it is 100% owned by NZFL, which is 67.73% owned by Allied Farmers
Rural Limited ("AFRL"). AFRL is 100% owned by ALF. Accordingly, entry into
the Loan by its subsidiary, FMEL, will constitute entry into a transaction by
ALF for the purposes of Rule 9.2.1.
7. As at 30 July 2013, ALF's Average Market Capitalisation ("AMC") over the
previous 20 Business Days was approximately $1.6 million. As the value of the
Loan may be up to $1.5 million at any one time, this would exceed 10% of
ALF's AMC, which is likely to be approximately $160,000. Therefore, it is
expected that the Loan, when entered into, will constitute a Material
Transaction with a Related Party for the purpose of Rule 9.2.1(a).
Application
8. ALF has applied to NZX Regulation ("NZXR") for a waiver from Rule 9.2.1 to
enable FMEL to enter into the Loan without the prior approval of ALF's
shareholders.
9. In support of its application ALF made the following submissions:
(a) The purpose of Rule 9.2.1 is to ensure that a Related Party does not
exercise undue influence, or use its personal connections, to reach a
favourable outcome, or a transfer of value, to a Related Party, in respect of
a transaction, and that shareholders are given an opportunity to review
transactions where the Board of Directors of a listed company may have been
subject to an actual or perceived influence from a Related Party.
(b) In situations where NZXR is satisfied that the Related Party did not
materially influence the decision to enter into the relevant transaction, and
there is evidence that the transaction is arm's length, and in the best
interests of the company, NZXR may waive the requirement to obtain
shareholder approval. This approach is reflected in the following NZX waiver
decisions, each of which concerned the provision of finance by a Related
Party:
(i) NZ Windfarms Limited dated 20 November 2009;
(ii) Eastern Hi Fi Group Limited dated 25 June 2009;
(iii) Broadway Industries Limited dated 12 September 2008; and
(iv) Allied Farmers Limited dated 24 July 2012.
(c) The provision of the Loan to FMEL is being made on arms length,
commercial terms, the benefits of which are demonstrably materially
beneficial to ALF. The bobby calf business is a significant contributor to
the profits of FMEL and NZFL, which, via distributions from NZFL to ALF, make
up almost the sole source of revenue for ALF. Without the Loan, the bobby
calf business would be unable to operate for the 2013- 14 seasons, and the
revenues of ALF would materially deteriorate, meaning that one of the
assumptions underlying ALF's going concern would no longer be valid. A likely
outcome of that would be the insolvency of ALF, resulting in a catastrophic
loss in value for ALF's shareholders.
(d) The joint lender with Mr Bluett is not a Related Party of ALF. The joint
lender is not a relative of Mr Bluett nor is the joint lender a business
associate of Mr Bluetts' other than in relation to the Loan and previous
years' loans to FMEL. The fact that the joint lender is unrelated and is
contributing 85 per cent or more of the Loan underscores the rationale for
the Loan terms being agreed on an arms length and commercial basis.
(e) The costs associated with seeking shareholder approval for the Loan would
far outweigh the benefits in the context of ALF's very low AMC.
(f) The funding which would be made available by the Loan is urgently
required for FMEL's operation of the 2013 bobby calf business as the 2013
bobby calf season has already started.
(g) ALF's working capital is fully committed to existing and forecast
obligations, and therefore ALF does not have sufficient spare funds available
to fund the costs of the required independent appraisal report and
shareholders' meeting.
(h) Theoretically the last opportunity that ALF had to seek shareholder
approval for the Loan without having to incur the significant cost of a
shareholders' meeting to specifically consider this matter would have been
the Annual Meeting held in November 2012. However, AFL submits that it would
have been impossible to seek consent at that time to the Loan because:
(i) Based on the information that ALF had at the time, a related party loan
similar to the 2012 season loan was not the likely or preferred funding
option that ALF contemplated would be secured for the 2013 season. However,
due to the 2013 drought impacting on FMEL earnings, the resultant need for
funding levels much higher than expected, coupled with a delay for NZFL in
obtaining ownership of key saleyard interests leading to lower capital and
assets available for security, meant that the preferred option of trading
bank funding has not been available. The seeking of a Loan from a related
party, whilst acknowledged as having occurred in both the 2011 and 2012
seasons, is unusual and has very much been a last resort. As mentioned above,
ALF expected that NZFL and/or FMEL would be able to source funding from a
typical third party such as a trading bank given the successful track record
that was established in 2011 and 2012. However, it has transpired that
typical lenders have maintained the view that although it is possible for
lending to FMEL to be secured against insured bobby calf/veal products, to
some degree the security available remains unattractive to third party
lenders due to the fact that most of the product is exported to numerous
overseas markets and there is significant volatility in returns on the
product. This also reflects the overall risk profile of the business. An
approach to the NZFL banker has confirmed this view;
(ii) Even if ALF had speculated in 2012 that it may require further funding
for the 2013 season from the same related party, it had no way of knowing
what the terms of that funding might be, and therefore it would not have been
possible to seek an independent appraisal as to whether those terms were
fair. This is illustrated by the fact that the key terms are materially
different than for the 2012 season - level of funding, number of tranches
available over two seasons, interest rate, and relative contribution by joint
funders are all different. It would not be reasonable for ALF to incur the
significant costs of an independent appraiser on the off chance that a)
NZFL/FMEL would require funding from a third party, and b) those terms would
be the same as for the loan for the 2012 year. If the Board of ALF had done
so, and it transpired that the approval was not required, or the terms were
materially different, it would have been rightly accused of having wasted
company money; and
(iii) There was no indication in 2012 from the funders that they would be
prepared to provide funding for the 2013 season, and again it would be
unreasonable to require ALF to incur those significant costs when the funders
were not even prepared in the period leading up to the 2012 Annual Meeting to
provide any indication as to whether their funding would be available for the
2013 season. If at that time the funders were certain that they would provide
the loan funding, and NZFL/FMEL were certain they would take it, then the
commercial response from the parties would have been to enter into a
multi-year funding facility, and a waiver or shareholder approval sought at
that time for that facility. The fact that was not the case evidences the
intention of the parties that the funding would be limited to the 2012
season.
(i) NZFL and FMEL have during the last 18 months engaged in discussions with
potential third party funding providers and banks regarding the provision of
working capital facilities to FMEL and other investment options. It became
clear at the end of July that third party or bank funding would not be
provided. ALF does not currently consider that such banking facilities
represent a realistic funding alternative for the following reasons:
(i) FMEL has approached a significant number of New Zealand banks seeking
banking support but without success;
(ii) It is noted that in recent times, developing a capability and banking
relationship supportive of the funding of a high priority impending sale yard
investment by NZFL has determined primary focus in this area.
(j) The terms of the Loan and FMEL's decisions to enter into the Loan have
been commercially negotiated by ALF's and FMEL's management (excluding Garry
Bluett), on commercial and arms' length terms. Garry Bluett has not been
involved in negotiating the Loan on ALF/NZFL/FMEL's behalf and he has not
been afforded any favourable treatment because of his status as a Director of
FMEL's parent companies.
(k) The terms of the Loan are substantially similar to (or no more onerous
than) terms offered by other third party debt providers. The interest rate
under the Loan is 10.9%, which is referable to rates currently charged to ALF
by its primary lenders.
(l) A loan facility with a maximum value of $1.2 million and on substantially
similar terms as the Loan was provided by Garry Bluett jointly with the same
unrelated party in relation to the bobby calf business for the 2012 season.
The first drawing on last year's loan was made in August 2012 and the loan
was fully repaid in February 2013. NZXR granted a waiver in relation to the
funding for the 2012 season.
(m) It is appropriate that this waiver should be granted on the condition
that all of the Directors of ALF (except Garry Bluett) provide certification,
in a form acceptable to NZX Regulation, that:
(i) Garry Bluett took no part in the negotiation of the Loan on behalf of ALF
or FMEL;
(ii) they consider that the terms and conditions of the Loan were negotiated
on a commercial and arms' length basis, and reflect standard terms for such
agreements;
(iii) they consider that the Loan was entered into at not more than a market
price, and is in the best interests of shareholders of ALF; and
(iv) in entering into the Loan, neither ALF nor FMEL was influenced in its
decision by the Related Party nexus between ALF, FMEL and Garry Bluett.
Rules
10. Rule 9.2.1 provides that:
"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
(b) in the case of a guarantee or other transaction of the nature referred
to in paragraph (d) of the definition of Material Transaction, a direct or
indirect beneficiary of such guarantee or other transaction,
unless that Material Transaction is approved by an Ordinary Resolution of the
Issuer."
11. Rule 9.2.2 provides that:
"For the purposes of Rule 9.2.1, "Material Transaction" means a transaction
or a related series of transactions whereby an Issuer:
...
(c) borrows, lends, pays, or receives, money, or incurs an obligation, of an
amount in excess of 10% of the Average Market Capitalisation of the Issuer;
or"
12. Rule 9.2.3 provides that:
"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:
(a) a Director or executive officer of the Issuer or any of its Subsidiaries;
or"
Decision
13. On the basis that the information provided to NZXR is full and accurate
in all material respects, NZXR grants ALF a waiver from Rule 9.2.1, so that
FMEL may enter into the Loan without the prior approval of ALF's
shareholders.
14. The waiver in paragraph 13 is granted on the following conditions:
(a) the Directors of ALF (excluding Garry Bluett) certify, at the time the
Loan is entered into, in a form acceptable to NZXR, that:
(i) Garry Bluett took no part in the negotiation of the Loan on behalf of ALF
or FMEL;
(ii) the terms and conditions of the Loan were negotiated on a commercial and
arms' length basis, and reflect standard terms for such agreements;
(iii) the Loan was entered into at not more than a market price, and is in
the best interests of shareholders of ALF; and
(iv) neither ALF nor FMEL was influenced in its decision to enter into the
Loan by the relationship between ALF, FMEL and Garry Bluett; and
(b) ALF obtains approval from its shareholders for the drawdown by FMEL of
funds under the Loan for the 2014 season in accordance with Rule 9.2.1 before
FMEL makes any drawdowns under the Loan for the 2014 season.
Reasons
15. In coming to this decision, NZXR has considered the following matters: ?
(a) The policy behind Rule 9.2.1 is to prevent transactions where there is
undue influence by a Related Party on an Issuer's decision to undertake a
transaction favourable to that Related Party;
(b) The terms of the Loan are substantially similar to (and no more onerous
than) the terms of arrangements between ALF and NZFL and third party debt
providers;
(c) The 2013 season funding is urgently required for FMEL's operation of the
2013 bobby calf business, as the 2013 bobby calf season has already started.
The bobby calf business is a significant contributor to the profits of FMEL
and NZFL, and make up almost the sole source of revenue for ALF. Without the
Loan, the bobby calf business would be unable to operate for the 2013-14
seasons, which could result in ALF becoming insolvent, which would not be in
the best interests of shareholders;
(d) NZXR expects Issuers to, where possible, seek approval from shareholders
for transactions that require approval under Rule 9.2.1, particularly where
the transaction occurs on a routine or seasonal basis. NZXR is disappointed
that ALF did not plan ahead to ensure that shareholder approval to the Loan
could have been obtained. However, NZXR acknowledges the difficulties set out
in paragraph 9(h) that ALF faced in planning to obtain shareholder approval
for the 2013 season funding. On balance NZXR considers that the benefits of
calling a shareholders' meeting to consider entry into the Loan are
outweighed by the adverse effects on the financial position of the ALF group
that are likely to eventuate if FMEL's receipt of the funding is delayed;
(e) The condition in paragraph 14(b) requires ALF to obtain shareholder
approval for the drawdown by FMEL of funds under the Loan for the 2014 season
before FMEL makes any drawdowns under the Loan for the 2014 season, which
will ensure that ALF shareholders have an opportunity to consider and approve
the funding arrangements for 2014;
(f) The certifications provided by ALF's Directors (excluding Garry Bluett)
provide shareholders with comfort that the Loan is on commercial and arms'
length terms, is in the best interests of ALF and its shareholders, and was
not influenced by Garry Bluett; and
(g) There is precedent for this decision.
Confidentiality
16. ALF requests that this application and any decision are kept confidential
until the Loan has been finalised and, if required, announced to the market.
17. In accordance with Footnote 1 to Rule 1.11.2, NZXR grants ALF's request.
ENDS
End CA:00240126 For:ALF Type:WAV/RULE Time:2013-08-23 12:14:48
