How the new Governor General's firm made a cool $20m
The new Governor-General Dame Patsy Reddy was a tough businesswoman and lawyer prepared to take the steps necessary to crunch deals. Martin van Beynen revisits a deal which earned her firm an easy $20 million profit but also some criticism from the High Court.
It's not often New Zealanders get a Governor-General who is a highly successful business figure.
Even rarer is someone who kept company with such business titans and corporate raiders as Ron Brierley, (now Sir Ron Brierley), Bruce Hancox and Paul Collins (now Sir Paul Collins). Patsy Reddy is one of those rare individuals. She worked for Brierley Investments for 11 years. She then joined Collins in Active Equities after Collins was ousted from Brierley.
Ordinary wage and salary earners would normally get no more than a glimpse into the cut throat world of corporate raiding, where millions are made and lost over morning tea.
One deal, however, that involved Reddy, got a lot more scrutiny than most because it ended up in court.
The deal was caught up in a bitter dispute between two of NZ's biggest meat companies - Richmond, based in Hawkes Bay, and PPCS, based in Dunedin. PPCS wanted to take over Richmond and used a method ultimately declared illegal, with the courts frowning on what they deemed "seriously misleading" statements.
Richmond and others fought the takeover and in August, 2002 , then High Court judge Justice William Young (now on the Supreme Court) - ruled PPCS breached the takeover code in trying to secure a stake in Richmond.
Justice Young took a dim view of the shenanigans and forfeited 17.6 per cent of PPCS's stake in Richmond and cancelled PPCS's voting rights on the remainder of its stake. The Court of Appeal went on to uphold the forfeiture but returned the voting rights, essentially giving PPCS 63 per cent of Richmond.
The soon-to-be sworn-in Governor-General and her business partners were involved in a peripheral but important way which requires a bit of back tracking to explain.
Reddy and Collins were directors and shareholders of a company called Active Equities (AE) that had several subsidiaries. The company was formed in 1998 with Reddy one of the founding directors.
When PPCS, (now Silver Fern Farms) decided in the late 90s it wanted a piece of Richmond, it knew Richmond wouldn't be enthusiastic and fearing counter-measures, began to sneakily buy shares in Richmond through nominees.
The then Meat Board had a one third interest in Richmond and when it decided to sell, PPCS was of course very interested but wanted to hide that interest, knowing Richmond would be hostile.
To get around this, the company funded a colluding and well-compensated Maori farming entity called HKM to buy the Meat Board shares.
In 1998 the deal (about $15m) was finalised with a Westpac loan to HKM completely funding the deal. Richmond eventually found out and PPCS, for various reasons, some of which related to not wanting the underhand dealing to come out, decided to sell.
Patsy Reddy's firm AE was one of two possible buyers. It bought the shares for about $29m but did not have to spend a cent of its own.
This was because PPCS paid $12.5m for shares in a subsidiary of AE and guaranteed an $18m loan from Citibank to the AE subsidiary buying the Richmond shares. The extra $1.5m was to cover interest costs.
Richmond was suspicious - it had to approve the sale for the deal to go ahead - and asked the directors of AE for a statutory declaration. Collins provided the declaration, revealing something of the shares bought by PPCS but said nothing about a guarantee or indemnity. The declaration was in Justice Young's view "wrong".
In any event Richmond came to believe that AE was simply holding on to the shares for PPCS. Its view, subsequently found to be wrong, was initially reinforced by a fascinating bit of detective work. Its in-house lawyer arranged for a third party to sound out the Citibank officer behind the deal.
He had moved to London so the third party flew there and pretending to be looking for a banker for a particular client got the Citibank official talking about the AE deal. He disclosed his belief that AE was "warehousing" the shares for PPCS and revealed the guarantee PPCS had given to Citibank.
Richmond representatives were outraged and confronted Collins and Reddy. Reddy provided the response.
"The initial response which Reddy gave involved a denial that any guarantee had been given by PPCS, an answer which she considered to be strictly true (because she considered the indemnity not to be a guarantee) but which further increased suspicions about Active Equities," Justice Young later said of the exchange.
He said the documentation - structured as a deed of indemnity - was unusual because the solicitors involved wanted to avoid any argument that the arrangements were caught by the Securities Act. For this reason PPCS was not given some normal guarantor entitlements. Nonetheless, whatever it was called the arrangement was in economic substance a guarantee, Justice Young said.
AE sold the Richmond shares in 2001 to PPCS which paid AE over $50m. In the space of about a year, AE had made a $20m profit on a deal which did not require it to put any of its capital at risk.
In the High Court hearing before Justice Young, AE was not a party but figured prominently and was represented by one of NZ's top Queens Counsel Jim Farmer.
After the High Court proceedings, AE sought costs arguing it was a successful party and entitled to legal costs. Richmond opposed any award saying the behaviour of AE relating to the guarantee disqualified it from any relief.
Justice Young said in normal circumstances he would have awarded costs to AE but not in this case.
But AE had brought the litigation on itself, he said.
"I am satisfied that the statutory declaration by Mr Collins was false...The declaration is so obviously wrong that it is really difficult to see how any sensible commercial person could have regarded it as correct. The arguments advanced by Collins and Foley (AE's lawyer) struck me as being forced and artificial. The declaration was necessary if the AE transaction was to proceed smoothly. As a result of that transaction AE was, in due course, in make in excess of $20m.
"Although profits of that magnitude were not within the specific contemplation of AE personnel at the time, they did intend to make a profit and there was thus a strong motive for Mr Collins to do whatever it took to ensure that the transaction could proceed.
"...I am prepared to accept that there is a reasonable doubt on the issue of whether Foley and Collins managed to persuade themselves that the declaration was literally true. This might be thought to involve a pretty charitable view of their states of mind. On a common sense basis, it is certainly likely that they did know that the declaration was untrue."
Justice Young said the "mental gymnastics" involved in the "self persuasion exercise" would not have been known to the Richmond directors.
"...I am perfectly satisfied that even if Foley and Collins had convinced themselves that the declaration was literally true, they must still have known that it was seriously misleading."
In the costs judgement Justice Young also referred to Patsy Reddy's denial of the existence of a PPCS guarantee.
" I think that the indemnity was, in fact, a guarantee and that her denial of the existence of a guarantee was wrong. I accept that she believed that what she was saying was strictly speaking correct. It was nonetheless misleading and this in a context where the people she was speaking to had a fairly clear idea what the true position was. Her conduct further contributed to the suspicions which surrounded AE's role in these proceedings."
AE's "misleading conduct" made it inevitable there would be a legitimate inquiry into whether the Securities Amendment Act 1988 had been breached, Justice Young said.
Reddy declined to answer a number of questions put by Fairfax including how much she made personally from the Richmond transaction and what she knew about the declaration said by Justice Young to require mental gymnastics to believe it was true. She was invited but declined to comment on the ethics of the $20m profit.
In a statement she said the High Court found the transactions to which AE was a party did not breach the law nor Richmond's constitution.
"The Court found that the shortfall indemnity (this is the instrument Young said was a guarantee) provided by PPCS created no relevant interest in the shares and that PPCS did not have the normal entitlement of a guarantor."
"I acted correctly and honestly in all of my dealing in relation to these transactions, as I have done throughout my career....The events in relation to the Richmond/PPCS litigation are a matter of public record and were widely reported at the time. They were known to the those who have selected me for subsequent governance roles in both the private and public sectors."
* Guarantee: A pledge or agreement to be responsible for another's debt or contractual performance if that other person does not pay or perform.
* Indemnity: An indemnity contract arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual.