ALF
06/09/2013 17:04
WAV/RULE
REL: 1704 HRS Allied Farmers Limited
WAV/RULE: ALF: ALF - Application for Waivers from NZSX Listing Rules
NZX Regulation Decision
Allied Farmers Limited (ALF)
Application for waiver from NZSX Listing Rules
9.1.1(b) and 9.2.1
6 September 2013
Background
1. Allied Farmers Limited ("ALF") is a Listed Issuer with ordinary shares
quoted on the NZX Main Board.
2. ALF intends to sell the following livestock saleyards interests (the
"Saleyards Interests") owned by ALF to NZ Farmers Livestock Limited ("NZFL"):
(a) Frankton;
(b) Stratford;
(c) Kauroa (Raglan);
(d) Te Kuiti; and
(e) Rongotea,
at a price equivalent to the registered valuation of the Saleyards Interests,
being not more than $3.75 million in total (the "Saleyards Sale").
3. ALF either owns the Saleyards Interests outright or in conjunction with
other operators. NZFL currently operates the Saleyards Interests under an
agency agreement with AFL. In relation to all but one of the Saleyards
Interests the consent of other third party owner(s) of the Saleyards
Interests to the transfer is a condition precedent to the Saleyards Sale.
4. ANZ Bank New Zealand Limited ("ANZ") and Linda Morrison, the spouse of
Steve Morrison (the Chief Executive of Allied Farmers Livestock Limited and
NZFL), have agreed to provide funding to NZFL to enable NZFL to purchase the
Saleyards Interests from ALF (the "NZFL Funding").
5. The ANZ funding will include the following principal terms:
(a) Facility of not more than $3.05 million;
(b) Term - repayable in three years from drawdown;
(c) Security - First ranking General Security Agreement over the assets of
NZFL; mortgage over Saleyards Interests;
(d) Floating interest rate starting at 6.04% per annum; and
(e) Default interest of the rate specified in paragraph 5(d) plus 5% per
annum,
(the "ANZ Funding").
6. The funding from Linda Morrison will include the following principal
terms:
(a) Facility of not more than $0.70 million;
(b) Term - repayable three years from drawdown;
(c) Security - Second ranking General Security Agreement over the assets of
NZFL; second ranking mortgage over Saleyards Interests;
(d) Interest of 12% per annum;
(e) Interest only (principal repaid in a lump sum at the end of the term);
(f) Default interest of the rate specified in paragraph 6(d) plus 5%,
(the "Morrison Funding").
7. The Saleyards Sale and the NZFL Funding are together referred to in this
decision as the "NZFL Transaction".
8. The proceeds of the Saleyards Sale will be used by ALF to reduce existing
indebtedness to Crown Asset Management Limited ("CAML"). CAML has indicated
that it will re-advance to Allied Farmers Rural Limited ("AFRL") up to
$910,000 of the approximately $3.75 million repaid to CAML from the proceeds
of the sale of the Saleyards Interests to NZFL (the "Re-advance"). The terms
of, and security for, the Re-advance will be pursuant to and within the
limits of the existing secured lending facilities from CAML to ALF and AFRL.
9. The Re-advance will comprise:
(a) up to $310,000, which can be drawn down immediately on completion of the
sale of the Saleyards Interests and will be used to reduce debt and repay
creditors ("Working Capital Funding"); and
(b) $600,000 which will be used in partial satisfaction of AFRL's obligations
to the Inland Revenue Department, the drawdown of which is conditional on
(among other things) ALF agreeing settlement terms with the Inland Revenue
("Settlement Funding").
10. AFRL owns 66.96% of NZFL. AFRL is 100% owned by ALF.
Application One - Waiver sought from Rule 9.1.1(b)
11. Rule 9.1.1(b) prohibits, except with the prior approval of an ordinary
resolution of shareholders, an Issuer from disposing of an asset which would
change the essential nature of the business of the Issuer, or in respect of
which the gross value is in excess of 50 percent of the Average Market
Capitalisation of the Issuer.
12. As at the date of this decision, ALF's Average Market Capitalisation
("AMC") over the last 20 Business Days is approximately $1.73 million. The
NZFL Transaction and the Re-advance are a series of linked or related
transaction in respect of which the gross value is $4,660,000, which is in
excess of ALF's AMC.
13. In the absence of a waiver, entry into the Saleyards Sale, the NZFL
Funding and the Re-advance would require approval by an ordinary resolution
of the shareholders of ALF under Rule 9.1.1(b).
14. ALF seeks a waiver from NZSX Listing Rule ("Rule") 9.1.1(b) in relation
to the NZFL Transaction and the Re-advance.
15. ALF made the following submissions in support of its application for a
waiver from Rule 9.1.1(b):
(a) The NZFL Transaction is critical and urgent as the Re-advance is
conditional on the NZFL Transaction. There have been very significant delays
in obtaining the consents of other third party owners of the Saleyards
Interests to the sale of the Saleyards Interests to NZFL. After many months
of negotiations and discussions, the consents have only very recently been
granted.
(b) CAML has advised that the Working Capital Funding will only be made
available to ALF in the event that the secured debt to CAML is reduced by way
of the Saleyards Sale and the Settlement Funding will only be made available
in the event that, among other things, a settlement agreement is reached with
the IRD. The Re-advance is required by ALF to support the assumptions
underlying ALF's going concern basis, and any further delay in receiving such
funding could significantly destroy the value of the investments
(particularly in the rural businesses) and therefore put ALF at risk. CAML,
as secured lender, understands those risks and that understanding underpins
its motivation to provide the Re-advance, which also has the effect of being
in the best interests of shareholders. If the Saleyards Sale is not
completed, and the Re-advance is consequently not made, the Directors would
need to seriously consider whether ALF could continue to trade, in which case
significant value would be lost for shareholders, creditors and other
stakeholders.
(c) ALF does not consider that it is practical or possible to seek the
approval of shareholders for the NZFL Transaction or Re-advance as:
(i) the earliest date ALF could reasonably arrange for a meeting of
shareholders in compliance with the Rules is after the date by which ALF
needs to access the funds subject of the Re-advance;
(ii) The opportunity to undertake the NZFL Transaction has only become
possible very recently, as the preparation of documentation and completion of
the NZFL Transaction could not proceed until the consents of the other owners
of the Saleyards Interests could be obtained;
(iii) CAML was only in a position to indicate on 15 August 2013 that it was
prepared to consider making the total of the Re-advance available; and
(iv) Prior to Friday 30 August 2013 it was proposed that the NZFL Funding
would be provided by CAML, with drawdown proposed for 6 September 2013.
Subject to obtaining an NZXR waiver, ALF and NZFL had been on track to
achieve this. Recently NZFL has been in renewed discussions with ANZ
regarding the provision of alternative funding on more attractive terms than
the CAML funding option. On Friday 30 August 2013 the ANZ Bank and,
subsequently, Linda Morrison, indicated that they would be able to provide
the NZFL Funding in substitution for the CAML funding. On Saturday 31 August
NZFL determined that the ANZ Funding and Morrison Funding was more
attractive, and accordingly agreed to pursue the ANZ Funding and Morrison
Funding. The urgency has therefore not arisen due to any lack of foresight or
diligence on either ALF's or CAML's part; and
(v) the costs associated with seeking shareholder approval for the NZFL
Transaction and Re-advance would outweigh the benefits in the context of
ALF's very low AMC. We note in this regard that at the Annual Meeting of
shareholders on 27 November 2012 shareholders were advised of the need to
sell the Saleyards Interests to NZFL, with no adverse comment. Further, an
announcement was made to the market the same day which included the copies of
the slides indicating that one of the proposed next steps is the NZFL
Transaction. Again, ALF has received no adverse comment or feedback on that
announcement. Furthermore, ALF has very limited cash and resources and
therefore the cost of a shareholders' meeting is relatively very expensive
and ultimately a cost that impacts on shareholder value in a situation where
an asset is being transferred to a subsidiary at valuation, and the outcome
of the transfer is in reduction of debt and attracts further financial
support.
(d) The waiver should be granted on the condition that all of the Directors
of ALF provided certification, in a form acceptable to NZXR, that:
(i) the terms of the NZFL Transaction and the Re-advance were negotiated on a
commercial and arms' length basis and are fair and reasonable;
(ii) the entry into the NZFL Transaction and the Re-advance is in the best
interests of ALF and all shareholders of ALF; and
(iii) the Re-advance is made pursuant to, and within the limits of, the
existing secured loan facility provided by CAML to ALF and AFRL, which, when
established, was negotiated on a commercial and arms' length basis.
Application One - Rules
16. 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
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."
Application One - Decision
17. On the basis that the information provided to NZXR is full and accurate
in all material respects, NZXR grants ALF a waiver from Rule 9.1.1 so that
ALF is not required to obtain shareholder approval for the NZFL Transaction
or the Re-advance.
18. The waiver in paragraph 17 is granted on the condition that the Directors
of ALF certify in writing to NZXR, at the time the NZFL Transaction and the
Re-advance are entered into, in a form acceptable to NZXR, that:
(a) the terms of the NZFL Transaction and the Re-advance were negotiated on a
commercial and arms' length basis and are fair and reasonable;
(b) the Saleyards Sale was entered into at not less than market price;
(c) the entry into the NZFL Transaction and the Re-advance is in the best
interests of ALF and all shareholders of ALF; and
(d) the Re-advance is made pursuant to, and within the limits of, the
existing secured loan facility provided by CAML to ALF and AFRL, which, when
established, was negotiated on a commercial and arms' length basis.
Application One - Reasons
19. In coming to this decision, NZXR has considered the following matters in
relation to Rule 9.1.1: ?
(a) ALF urgently requires the Working Capital Funding in order to reduce debt
and repay creditors and the Settlement Funding to be available to be paid
towards the settlement with the Inland Revenue Department. CAML will only
provide this funding if the NZFL Transaction proceeds;
(b) if the Working Capital Funding is not obtained immediately the ALF
Directors would need to seriously consider whether ALF could continue to
trade and whether ALF could continue as a going concern. If the Settlement
Funding is unavailable ALF will be unable to meet the terms of the settlement
and it is likely that the Inland Revenue Department will apply to liquidate
ALF. In these scenarios significant value would be lost for shareholders,
creditors and other stakeholders;
(c) the opportunity to undertake the Saleyards Sale has only become possible
very recently as the consent of the other owners of the Saleyards Interests
was required;
(d) for the reasons set out above it is not possible for ALF to seek the
approval of shareholders for the NZFL Transaction or the Re-advance;
(e) ALF would be adversely affected if the Saleyards Interests were
transferred to a person other than NZFL. If the Saleyards Interests were
transferred to a third party NZFL would not be able to access and operate the
saleyards which would have a materially detrimental impact on NZFL's
business. This in turn would have a materially detrimental impact on ALF's
67% shareholding in NZFL which would not be in the best interests of ALF's
shareholders; and
(f) the certifications provided by ALF's Directors provide shareholders with
comfort that the NZFL Transaction and the Re-advance have been entered into
on commercial and arms' length terms and are in the best interests of ALF and
its shareholders.
Application Two - Waiver sought from Rule 9.2.1
20. Rule 9.2.1 restricts an Issuer from entering into a Material Transaction
if a Related Party is, or is likely to become, 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.
21. As at the date of this decision, ALF's AMC over the last 20 Business Days
is approximately $1.73 million. The Saleyards Interests have an Aggregate Net
Value of $3.75 million which exceeds ALF's AMC. Accordingly, the Saleyards
Sale constitutes a Material Transaction in accordance with Rule 9.2.2(a). The
Morrison Funding and the Re-advance form part of a related series of
transactions with the Saleyards Sale.
22. The following people are Related Parties of ALF in connection with the
Saleyards Sales for the purposes of Rule 9.2.3:
(a) NZFL, as an Associated Person of ALF in accordance with Rule 9.2.3(c);
(b) Oliver Carruthers, as a director of NZFL in accordance with Rule
9.2.3(a). Mr Carruthers is also an indirect shareholder in NZFL;
(c) Simon Williams, as a director of NZFL in accordance with Rule 9.2.3(a).
Mr Williams is also an indirect shareholder in NZFL; and
(d) Linda Morrison, as an Associated Person of Steve Morrison, an executive
officer of NZFL and AFRL, in accordance with Rule 9.2.3(c). Ms Morrison is
also an indirect shareholder in NZFL,
(together referred to as the "ALF Related Parties").
23. Linda Morrison is a Related Party of ALF in connection with the Morrison
Funding for the purposes of Rule 9.2.3 for the reason set out in paragraph
22(d).
24. Rule 9.2.3(f) does not apply such that NZFL would not be a Related Party
of ALF because the other ALF Related Parties have a material direct or
indirect economic interest in NZFL.
25. In the absence of a waiver, entry into the Saleyards Sale, the Morrison
Funding and the Re-advance would require approval by an ordinary resolution
of the shareholders of ALF under Rule 9.2.1.
26. Shareholder approval is not required for the ANZ Funding as that funding
was entered into on arm's length terms and in the normal course of NZFL's
banking business and accordingly the exemption in Rule 9.2.4(a) applies.
27. ALF seeks a waiver from Rule 9.2.1 in relation to the Saleyards Sale, the
Morrison Funding and the Re-advance.
28. ALF made the following submissions in support of its application for a
waiver from Rule 9.2.1:
(a) The purpose of Rule 9.2.1 is to ensure that a Related Party does not
exercise undue influence, or use 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) 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; and
(iii) Broadway Industries Limited dated 12 September 2008.
(c) ALF is not in a position to sell the Saleyards Interests to any person
other than NZFL without destroying the value of NZFL. Not only has ALF
granted NZFL a call option allowing NZFL to purchase the Saleyards Interests
at any time for registered valuation, but, regardless, if ALF sold the
Saleyards Interests to a person other than NZFL, NZFL's ability to operate
would be materially detrimentally impacted, as access to and operation from
the yards supports the majority of NZFL's business. Given that NZFL is a
subsidiary of ALF, the detrimental impact arising from removing yard access
would in turn materially detrimentally impact on the value of ALF's 67%
shareholding in NZFL.
(d) The terms of the NZFL Transaction has been commercially negotiated on
arms' length terms as follows:
(i) The terms of the ANZ Funding were negotiated with ANZ on behalf of NZFL
by NZFL management and with assistance from NZFL's external legal counsel and
Allied Group's legal and accounting consultants. ANZ is not a related party
of either NZFL or ALF, and in the absence of such a relationship there is no
influence by either party that could result in anything other than arms
length commercial terms; and
(ii) In relation to the Morrison Funding:
a. The terms were negotiated with Linda Morrison on behalf of NZFL by Garry
Bluett on a commercial and arms' length basis with assistance from NZFL's
external legal counsel and the ALF group's legal and accounting consultants.
Steve Morrison took no part in the negotiation of the Morrison Funding on
NZFL's behalf;
b. The terms are based on standard documentation. NZFL has canvassed banks
and participants in the financial markets and is satisfied that the interest
rate and default rate are appropriate and fair given the term of the funding,
the short term nature of the loan, the interest only terms, the risks
associated with being a second ranking lender (with this level of first
mortgage funding of this type of asset). ALF sought funding from a number of
directors and shareholders within the ALF group but was unable to source the
second priority funding from another source;
c. Second priority funding from an alternative source could not be obtained
in the time available. Over the past year, NZFL has actively pursued three
commercial banks to provide funding for the purchase of the Saleyards
Interests. Until now, the funding indicated by these banks would have
required a more significant proportion of the funding to be provided by a
second priority lender. NZFL was not able to source second priority lending
on that basis. Consequently, CAML agreed to provide all of the funding to
NZFL. However, the recent offer from the ANZ has meant that a second priority
lender could realistically fund a smaller proportion of the funding, and the
offer from CAML could be substituted with a combination of the ANZ Funding
and the Morrison Funding; and
d. The combination of the ANZ Funding and the Morrison Funding is more
attractive to NZFL than the originally proposed CAML funding option.
(iii) The terms of the NZFL Transaction involve no transfer of value from ALF
to NZFL. The only material term of the Saleyards Interests sale and purchase
agreement (in the context of ensuring no transfer of value between NZFL and
ALF) is the purchase price. There was no negotiation of the purchase price
between related parties because the parties agreed that the interests should
be transferred at independent registered valuation. The other terms are
simply as per the Auckland District Law Society standard form for the sale of
real estate.
(e) The terms of, and security for, the Re-advance will be pursuant to and
within the limits of the existing secured lending facilities from CAML to ALF
and AFRL.
(f) The waiver should be granted on the condition that all of the Directors
of ALF provide certification, in a form acceptable to NZXR, that:
(i) The terms of the Saleyards Sale, the Morrison Funding and the Re-advance
were negotiated on a commercial and arms' length basis and are fair and
reasonable;
(ii) neither ALF nor NZFL was influenced in its decision to enter into the
Saleyards Sale by the relationship between ALF and the ALF Related Parties,
and NZFL and the Related Parties;
(iii) neither ALF nor NZFL was influenced in its decision to enter into the
Morrison Funding by the relationship between ALF and Linda Morrison and NZFL
and Linda Morrison;
(iv) the entry into the Saleyards Sale, the Morrison Funding and the
Re-advance is in the best interests of ALF and all shareholders of ALF; and
(v) the Re-advance is made pursuant to, and within the limits of, the
existing secured loan facility provided by CAML to ALF and AFRL, which, when
established, was negotiated on a commercial and arms' length basis.
The submissions set out in paragraphs 15(a) to (c) also apply to ALF's
application for a waiver from Rule 9.2.1.
Application Two - Rules
29. 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."
30. 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"
31. 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
(b) the holder or a Relevant Interest in 10% or more of a Class of Equity
Securities of the Issuer carrying Votes; or
(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
...
but a person is not a Related Party of an Issuer if:
(f) that person is a Subsidiary of, incorporated joint venture of, or
unincorporated joint venture participant with, the Issuer and:
(i) no Related Party of the Issuer has or intends to obtain a material direct
or indirect economic interest in that Subsidiary, joint venture, or joint
venture participant, other than by reason of receipt of reasonable Director's
fees or executive remuneration; and
(ii) the Issuer is entitled to participate, directly or indirectly, in at
least one half of the income or profits, and the assets, of that person."
32. Rule 9.2.4(a) provides that:
"Rule 9.2.1 shall not apply to:
(a) Any transaction entered into by an issuer with a Bank which is a Related
Party of that Issuer as principal, on arm's length terms and in the normal
course of its banking business;"
Application Two - Decision
33. 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
ALF is not required to obtain shareholder approval for Saleyards Sale, the
Morrison Funding or the Re-advance.
34. The waiver in paragraph 33 is granted on the condition that the Directors
of ALF certify in writing to NZXR, at the time the Saleyards Sale, the
Morrison Funding and the Re-advance are entered into, in a form acceptable to
NZXR, that:
(a) the terms and conditions of each of the Saleyards Sale, the Morrison
Funding and the Re-advance were negotiated on a commercial and arms' length
basis and are fair and reasonable;
(b) the Saleyards Sale was entered into at not less than market price;
(c) neither ALF nor NZFL was influenced in its decision to enter into:
(i) the Saleyards Sale by the relationship between ALF, NZFL and the ALF
Related Parties;
(ii) the Morrison Funding by the relationship between ALF, NZFL and Linda
Morrison;
(d) the entry into each of the Saleyards Sale, the Morrison Funding and the
Re-advance is in the best interests of ALF and all shareholders of ALF; and
(e) the Re-advance is made pursuant to, and within the limits of, the
existing secured loan facility provided by CAML to ALF and AFRL, which, when
established, was negotiated on a commercial and arms' length basis.
Application Two - Reasons
35. In coming to this decision, NZXR has considered the following matters in
relation to Rule 9.2.1: ?
(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) in this instance it is unlikely that the ALF Related Parties or Linda
Morrison could have influenced ALF's decision to enter into the Saleyards
Sale, the Morrison Funding or the Re-advance. NZXR has no reason not to
accept ALF's submissions that:
(i) the terms of the Saleyards Sale and the Morrison Funding and ALF's
decision to enter into the Saleyards Sale and the Morrison Funding have been
commercially negotiated on arms' length terms; and
(ii) the terms of the Morrison Funding are appropriate and fair given the
nature of the funding;
(c) the Saleyards Interests are being transferred at an amount equal to their
independent registered valuation.
(d) for the reasons set out in paragraph 19(a) to (c) it is not possible for
ALF to seek the approval of shareholders for the Saleyards Sale, the Morrison
Funding or the Re-advance. As set out in paragraph 19(e), ALF would be
adversely affected if the Saleyards Interests were transferred to a person
other than NZFL for the reasons set out in paragraph 19(e);
(e) the certifications provided by ALF's Directors provide shareholders with
comfort that the Saleyards Sale, the Morrison Funding and the Re-advance have
been entered into on commercial and arms' length terms and are in the best
interests of ALF and its shareholders and that neither ALF nor NZFL was
influenced in its decision to enter into:
(i) the Saleyards Sale by the relationship between ALF, NZFL and the ALF
Related Parties; or
(ii) the Morrison Funding by the relationship between ALF, NZFL and Linda
Morrison.
Confidentiality
36. ALF requests that this application and any decision are kept confidential
until the NZFL Transaction and the terms of the Re-advance have been
finalised and, if required, announced to the market.
37. In accordance with Footnote 1 to Rule 1.11.2, NZXR grants ALF's request.
ENDS
End CA:00240844 For:ALF Type:WAV/RULE Time:2013-09-06 17:04:18
