Tough nut for Securities Commission to crack in Nuplex case

By Gareth Vaughan The Securities Commission is likely to lose its court case against Nuplex over the alleged breach of continuous disclosure rules,  but the case will still fulfill a valuable public policy service given the watchdog is being seen to be enforcing the law, a leading securities lawyer says. The commission last week filed proceedings in the High Court at Wellington against Nuplex over an alleged breach of listed company continuous disclosure rules for failing to disclose a banking covenant breach. Roger Wallis, a partner at Chapman Tripp who focuses on corporate and securities law, told interest.co.nz the case was factually complex and there were several layers of defence the Nuplex directors could credibly argue. Ultimately the case would come down to a matter of business judgment. “I don’t think they [the Securities Commission] will win it,” Wallis says. ”People often say the regulator has got the benefit of hindsight but in my experience the courts almost over compensate the other way and recognize that and turn around and say this is an area of business judgment.” The commission is seeking penalties of up to $1 million from six current or former Nuplex directors as well as from the company itself. The regulator alleges Nuplex was in breach of continuous disclosure rules under both NZX Listing Rules and the Securities Markets Act from December 22, 2008 until February 19, 2009. It argues the company failed to disclose a forecast breach, and then an actual breach, of its Senior Debt Cover Ratio (SDCR) on an A$350 million revolving multi-currency cash advance facility Nuplex had in place with four banks. They were Westpac, Commonwealth Bank of Australia, HSBC and Citibank. The resins and specialty chemicals group denies breaching continuous disclosure rules and says it and its directors will vigorously defend themselves against the allegations. Wallis says Nuplex can argue the breach didn’t require disclosure under NZX rules for various reasons including negotiations with its banks were incomplete and Nuplex may have prejudiced the issue by disclosing it too soon. And under the Securities Markets Act the directors have a defence if they can establish that in all circumstances they took reasonable steps. Wallis also suggests the Nuplex directors – managing director John Hirst, chairman Robert Aitken, Barbara Gibson, David Jackson, Bryan Kensington and Michael Wynter – will argue they relied on legal advice from Nuplex’s lawyers. They may also say they didn’t want to make December 2008’s forecast breach self fulfilling by telling the market about it. The commission argues the directors became aware on about December 17, 2008 that the SDCR for the half-year to December 31 would be 3.30 times, exceeding its limit of 3 times. On February 19, 2008, after an NZX share price inquiry, Nuplex announced that unless the SDCR rules were loosened, the breach would occur. Wallis also suggests affidavits from various experts could argue the market, perhaps via analysts’ reports, knew of the forecast breach anyway. Then there are issues around business judgment and timing. For example, when does a trend become a trend? Is a month of bad performance material information, especially if directors believe trading conditions will improve? In the Securities Markets Act the burden of proof is the balance of probabilities. But just because it won’t be an easy case for the commission to win, doesn’t mean it shouldn’t be taking the case, Wallis argues, saying there’s a need for clarity of continuous disclosure laws. “From a public policy perspective you can say it’s a valuable use of taxpayers money because anecdotally companies are probably going to focus on continuous disclosure more in the next few months and that’s not a bad thing given we’re still in reasonably fickle times.” And sometimes a regulator needs to be seen to be enforcing a law to create a deterrent, Wallis adds. This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.