Ipsofactoj.com: International Cases [2005] Part 4 Case 11 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Perry Corporation

- vs -

Ithaca (Custodians) Ltd

GAULT J

ANDERSON J

BLANCHARD J

GLAZEBROOK J

KEITH J

4 NOVEMBER 2003


Judgment

Glazebrook J

(with whom Gault P, Blanchard J & Anderson join)

INTRODUCTION

  1. Perry Corporation held shares in Rubicon Ltd. In late May and early June 2001 it sold most of those shares to Deutsche Bank and UBS Warburg, at the same time entering into matching equity swap contracts in respect of Rubicon shares. In July 2002 all of the swap positions were unwound and the Rubicon shares held as a hedge by the banks were purchased by Perry Corporation. There had also been a partial unwind of the Deutsche Bank swaps in September 2001.

  2. Guinness Peat Group (GPG) and Ithaca (Custodians) Ltd (a GPG subsidiary holding GPG’s share investments in New Zealand) claim that Perry Corporation breached the substantial security holder disclosure requirements under the Securities Amendment Act 1988 (from 1 December 2002 renamed the Securities Markets Act 1988) by not continuing to disclose an interest in Rubicon after the swaps had been entered into.

  3. Potter J, in a decision now reported at [2003] 2 NZLR 216, held that the mere fact of being a party to a cash settled equity swap creates no disclosure obligations under the Securities Markets Act. She held, however, that Perry Corporation and Deutsche Bank and UBS Warburg respectively had an arrangement or understanding that gave Perry Corporation the power to reacquire the Rubicon shares held by the banks as a hedge for the equity swaps and thus that Perry Corporation was required to disclose an interest by virtue of s5(1)(f) of the Securities Markets Act. She ordered one-third of the 36 million voting shares in Rubicon held by Perry Corporation to be forfeited and that Perry Corporation must sell a further 24 million shares within 180 days. She also ordered that no distributions be made on those shares while they were still held by Perry Corporation and that no voting rights be exercised on them. No damages were awarded to GPG as the Judge was not satisfied that GPG had suffered any loss.

  4. Perry Corporation appeals against the finding that there was an arrangement or understanding. In the event it is unsuccessful, it appeals against the forfeiture and sale orders, on the basis that such orders were disproportionate to the nature and consequences of any breach.

  5. GPG does not cross-appeal on whether the equity swaps per se give rise to a disclosure requirement or on the question of damages. It does seek to support the judgment on other grounds, namely that a disclosure obligation arose by virtue of s5(2) of the Securities Markets Act. Potter J did not deal with this point given her decision that the arrangements existed.

  6. Rubicon described its stance in the High Court proceedings as neutral, although it participated in the hearing. Rubicon’s submissions on this appeal were directed to challenging findings on Rubicon’s role that it considered adverse to Rubicon’s interests. It also made submissions on the question of remedy in the event that Perry Corporation’s appeal is unsuccessful. Rubicon submitted that a sale of 24 million shares over a period of six months would create a significant market "overhang" that would prejudice Rubicon’s other shareholders. GPG does not object to a modification of the sale order to accommodate Rubicon’s concerns.

  7. The issues for this appeal therefore are:

    1. Was the Judge correct to hold that there was an arrangement or understanding between Perry Corporation and the swaps counter-parties in terms of s5(1)(f) of the Securities Amendment Act (now Securities Markets Act) and thus that it had a relevant interest in the Rubicon shares?

    2. If not, did Perry Corporation have a relevant interest by virtue of s5(2)?

    3. If there was a relevant interest, were the orders as to forfeiture and sale disproportionate to any breach or otherwise inappropriate?

  8. There is a preliminary question whether Potter J wrongly imposed a reverse onus on Perry Corporation to establish, on the balance of probabilities, that no understanding or arrangement existed. Before turning to those issues we set out the legislative and factual background and provide a summary of Potter J’s judgment.

  9. For the reasons given in this judgment we have not been persuaded the Judge erred in her approach to the onus of proof. After analysing the evidence we have reached a conclusion different from that of the Judge on the central issue whether there was an arrangement or understanding under which Perry Corporation had the power to acquire the shares in Rubicon held by the swaps counter-parties. We are satisfied that the market reality was that the shares would be available for purchase and that the independent recognition of that by the parties did not constitute an arrangement or understanding. We do not consider s5(2) has application. Accordingly it is unnecessary to address remedy issues.

    THE LEGISLATION

  10. As indicated above, the relevant legislation at the time of the transactions was the Securities Amendment Act 1988 since renamed the Securities Markets Act 1988. The genesis of the Securities Markets Act was a 1981 Securities Commission report, Nominee Shareholdings in Public Companies: A Review of the Law and Practice with a Proposal for Reform. The Commission there recommended the introduction of a disclosure regime. It considered that a market needed to be informed in order to be efficient and this was not possible when vital information such as the identity of those who control or influence a company’s operation was unavailable.

  11. The disclosure regime is set out in ss20-22 of the Securities Markets Act. It requires substantial security holders to notify the public issuer and the Stock Exchange of a "relevant interest" in the voting securities of a public issuer, of changes to that stake of 1% or more, and of any changes in the nature of the relevant interest.

  12. A substantial security holder is defined in s2 as a person (including a company) who holds a relevant interest in 5% or more of the voting securities (securities conferring voting rights at shareholder meetings) of a public issuer. A relevant interest is very broadly defined in s5 to encompass not only beneficial ownership of securities but situations where, in practice, a person has a right or power to control what happens in relation to the securities. In particular s5(1)(f) includes a person who, under or by virtue of any trust, agreement, arrangement or understanding relating to the security, may at any time have the power to acquire or dispose of the security or have the power to control the acquisition or disposition of the security by another person. Section 5(2) extends the definition of a relevant interest further by providing that, where a person has a relevant interest by virtue of s5(1) and is accustomed or obliged to act in accordance with another person’s instructions or wishes in relation to voting, acquisition or disposition of the securities, then that other person also has a relevant interest in the securities.

  13. Section 30 confers jurisdiction on the Court to make a wide range of orders under s32 where there are "reasonable grounds to suspect" that a substantial security holder has not complied with the disclosure requirements. The Court may also, pursuant to s34, award compensation when shares have been bought or sold in circumstances where a substantial security holder has not disclosed any relevant interest.

  14. The relevant provisions are set out in full in Appendix Five to this judgment.

    BACKGROUND

  15. Perry Corporation is a United States based corporation, which manages and controls a number of investment funds of the type commonly known as hedge funds. Mr. Richard Perry is the sole shareholder. Perry Corporation’s investment philosophy is to focus on companies it determines are undervalued. Generally it looks for investments where management’s philosophies and strategies are compatible with its own. This is because a key component of its investment approach is to build strong relationships with senior management of the relevant companies regardless of the size of the investment. Perry Corporation’s funds under management at the end of 2002 were some US$5 billion of net assets.

  16. Rubicon was incorporated on 22 January 2001 following the Court-approved separation of Fletcher Challenge Ltd and was listed on the New Zealand and Australian Stock Exchanges on 26 March 2001. It was created to assist in the Fletcher Challenge separation process by acquiring assets that Shell was not able to acquire as part of its acquisition of Fletcher Challenge Energy and by supporting the capital raisings of Fletcher Challenge Forests which were necessary for that company to stand alone from the Fletcher Challenge Group. As a result of those capital raisings a Rubicon subsidiary, Rubicon Forest Holdings Ltd, acquired a 17.6% shareholding in Fletcher Challenge Forests.

  17. A second role envisaged for Rubicon was as a business development company. To move forward with this role Rubicon began intensive portfolio and capital restructuring. This included Rubicon’s total exit from its energy portfolio (leaving Rubicon with primarily forest-related assets). The immediate focus was on the disposition of non-core assets and the return of cash to shareholders rather than on new investment opportunities. Rubicon started life with around 38,000 shareholders, most of whom received their shares as a result of holding shares in Fletcher Challenge Energy. As expected, many elected to sell out following Rubicon’s listing and the turnover of the Rubicon share register was high. By July 2001 there had been a consolidation in Rubicon shareholdings with the number of shareholders declining significantly.

  18. On the listing day Perry Corporation had become a shareholder in Rubicon through its shareholding in Fletcher Energy, holding about 4.2% of the total number of Rubicon shares. By April 2001 its shareholding had increased to 10.18%. On 31 May 2001 Perry Corporation sold 14 million Rubicon shares to Deutsche Bank and 17 million Rubicon shares to UBS Warburg. These sales of Rubicon shares were matched by Perry Corporation entering a number of equity swaps transactions with Deutsche Bank and UBS Warburg as counter-parties. The swaps in question were allocated to particular funds administered by Perry Corporation.

  19. It is useful at this point to set out the nature of an equity swap. This was discussed in some detail at paras [45]-[64] of Potter J’s judgment. In brief, an equity swap transaction is a means of achieving economic exposure to equity securities without physically holding those securities. In a typical simple swap transaction one party (termed the equity amount payer) will pay an equity return calculated on the basis of returns on notional underlying shares while the other party will pay a return based on a financing rate (the fixed or floating amount payer). A diagrammatical representation is contained in Appendix One.

  20. Usually such swaps are cash-settled, meaning that only cash payments will be made by one party to the other and with no physical delivery of the shares to the fixed or floating amount payer at termination of the swap. However, it would be usual for the equity amount payer to hedge its position so as not to be exposed to equity risk. This will often, but not always, be achieved by holding physical securities to match (either wholly or in part) the notional securities that are the subject of the swap. A hedge can also be achieved by holding a different stock (for example, a security in the same industry or sector, or the same company listed on a different exchange), futures or options or by entering into an off-setting equity swap.

  21. Perry Corporation has entered into master agreements with Deutsche Bank and UBS Warburg in relation to all of its swaps. These are documented using the standard International Swap Dealers Association (ISDA) documentation. Individual confirmations in relation to particular swaps are then issued. The terms of the swaps at issue are set out in detail in the judgment of Potter J at paras [74] and [76]. For present purposes we note only that the UBS Warburg confirmations show that the final equity price for the UBS Warburg swaps was set at the weighted average execution price at which UBS Warburg unwinds its hedge in connection with the transaction. The termination date was set at 31 August 2001 but the swaps were rolled over on three occasions, to 30 November 2001, then to 28 February 2002 and finally to 28 February 2003. Either party could, however, terminate the swaps early on three business days’ written notice. For Deutsche Bank the final equity price was to be the closing price of the shares as quoted by the New Zealand Stock Exchange on the valuation date, which, if the swaps went until termination date, was to be 3 July 2002. In the event there was no such price because of a market disruption event, then the price was to be set at the price on the first succeeding exchange business day where there was no such market disruption. An early termination option on 60 calendar days notice was available to either party.

  22. Perry Corporation made further purchases of Rubicon shares after the 31 May 2001 swaps were entered into (which had reduced Perry Corporation’s shareholding in Rubicon to 2.89%). On 1 June Perry Corporation’s shareholding was 4.895% (as recorded in a substantial security holder notice of 5 June 2001) and by 5 June 2001 Perry Corporation had increased its shareholding to 4.966%. A further 10 million Rubicon shares were then sold to Deutsche Bank on 6 June 2001, matched by equity swap transactions on similar terms to those described above. Perry Corporation’s shareholding was thus reduced to 2.13%.

  23. On 5 September 2001 Perry Corporation partially unwound its equity swap position with Deutsche Bank and purchased 5 million Rubicon shares from Deutsche Bank to match a short position it had taken in order to participate in a Rubicon buy-back which Rubicon had announced after the sale of various energy related assets. This left Perry Corporation with less than 1% of Rubicon’s capital. Perry Corporation then began to purchase again, increasing its shareholding to 3.08% as at 5 June 2002.

  24. Towards the end of June 2002 GPG decided to start buying shares in Rubicon. The aim was to establish a holding of just under 20% (to avoid the 20% threshold for a full takeover offer). The major portion of the shares was acquired in an overnight book-build on 3 July 2002 which resulted in GPG holding 19.87% of the shares in Rubicon. GPG filed a substantial security holder notice on 4 July.

  25. GPG also had a direct shareholding in Fletcher Challenge Forests Ltd (Fletcher Forests), which at that time proposed to buy the Central North Island Forestry Partnership’s forestry estate (CNIF), which was for sale by CNIF’s receivers. As a part of that transaction Fletcher Forests was to buy back the shareholding of the Rubicon subsidiary, Rubicon Forest Holdings Ltd. The consideration was to be the transfer of forestry assets. Rubicon was also to sell further Fletcher Forest shares for approximately $NZ48.5m if the transaction went ahead. GPG did not consider this proposal to be to Rubicon’s long term benefit or in the best interests of New Zealand’s forestry industry. By contrast, Perry Corporation supported this proposal. There were also other Fletcher Forests’ shareholders which opposed the transaction, including Xylem, a US forestry investment fund with a shareholding of 7%.

  26. On 11 July 2002 all Perry Corporation’s swaps positions in relation to Rubicon shares were unwound and cash settled. Perry Corporation also purchased 19 million and 17 million shares from the respective counter-parties. The immediate trigger for the purchase of the shares was to enable Perry Corporation to vote, if necessary, at the first Rubicon annual general meeting to be held on 19 July 2002.

  27. Perry Corporation filed three relevant substantial security holder notices. The first was dated 23 April 2001 and was filed late. This notice showed "Richard C Perry" as holding 10.18% of the Rubicon shares on issue and reflected Perry Corporation’s holding as at 6 April 2001. The second substantial security holder notice dated 5 June 2001 showed that Perry Corporation had ceased to be a substantial security holder, having reduced its holdings to 4.895%. Perry Corporation’s third substantial security holder notice was dated 11 July 2002. It showed Perry Corporation holding 15.98% of the Rubicon shares and recorded the 17m shares purchased from UBS Warburg and the 19m shares purchased from Deutsche Bank.

  28. In Appendix Two we provide, for ease of reference, a list of the personnel of the various entities involved who are referred to in this judgment. We also provide a chronology of the main events in Appendix Three.

    POTTER J'S JUDGMENT

  29. As indicated above, Potter J held that the mere fact of entry into a cash settled equity swap creates no disclosure obligations under the Securities Markets Act. She found, however, that Perry Corporation retained a relevant interest in Rubicon shares sold to Deutsche bank and UBS Warburg under equity swaps because there was an arrangement or understanding pursuant to which Perry Corporation could repurchase the Rubicon shares from Deutsche Bank and UBS Warburg if it wished. The Judge’s conclusion was based on the following factors:

    1. Perry Corporation entered into the equity swaps in order to avoid the disclosure requirements under the Act.

    2. Throughout the relevant period Rubicon treated Perry Corporation as being a substantial shareholder.

    3. Perry Corporation was confident that the shares would be available for repurchase when they were needed before the Rubicon AGM.

    4. Mr. Moriarty (of Rubicon) was also confident that Perry Corporation could repurchase the shares.

    5. The language used in a telephone conversation of 8 July 2002 between Mr. Rosen of Perry Corporation and Mr. Madan of Deutsche Bank showed a mutual understanding that the shares would be available for purchase.

    6. On both occasions when Perry Corporation needed large parcels of shares urgently – for the Rubicon buy-back, and when it wanted to be able to exercise voting rights at the Rubicon AGM of 19 July 2002 – equity swaps were terminated on less notice than the contracts provided for and shares were repurchased.

    7. Perry Corporation had been described as a shareholder in discussions with Mr. Gibbs of GPG.

    8. Both Rubicon and Perry Corporation were concerned about GPG’s intentions and wished Perry Corporation to be able to exercise its voting rights as a major shareholder at the annual general meeting.

  30. Adopting the rule in Jones v Dunkel (1959) 101 CLR 298, Potter J also drew an adverse inference from the failure of certain witnesses, including Mr. Perry and Mr. Madan, to give evidence that the Judge said was likely not only to be helpful and relevant but possibly crucial. She also set out a number of factors she considered to be neutral, notably the evidence of Mr. Cohen from Deutsche Bank and Mr. Gray of UBS Warburg.

  31. In terms of remedy Potter J rejected GPG’s claims for damages under s34 of the Securities Markets Act and alternatively under the Fair Trading Act on the basis that GPG had not suffered compensatable loss. She did, however, make orders under s32 of the Securities Markets Act. Taking into account a number of factors, including that the non-disclosure was deliberate, that it lasted over 12 months and related to 36 million shares, the need for deterrence and the nature of Perry Corporation as a sophisticated investor, the Judge considered that the s32 orders should attempt to achieve the situation that Perry Corporation disclosed to the market; that is as a holder of less than 5% of Rubicon. Therefore, she ordered forfeiture of 12 million Rubicon shares (one-third of the 36 million voting securities that the equity swaps related to and that were not disclosed) valued at approximately $8 million; that within 180 days of the judgment Perry Corporation must sell the remaining 24 million shares in an on-market, arms length transaction; and that, in respect of the 24 million shares that are to be sold Perry Corporation shall not exercise voting rights or receive any payments from Rubicon in relation to them pending the sale.

    ONUS OF PROOF

  32. Mr. Galbraith QC, for Perry Corporation, submitted that Potter J wrongly imposed a reverse onus on Perry Corporation to provide a credible explanation that would serve to negate the conclusion she had drawn that an arrangement or understanding existed with each of the counter-parties to the swaps. He submitted that there is only one ultimate onus in a case and that rests on the party making the allegation, who must establish facts and inferences on which the Court can come to a conclusion of reasonable suspicion. In his submission there is no onus on the defendant and certainly no obligation to establish that there is no arrangement or understanding on the balance of probabilities.

  33. Mr. Asher QC, for GPG, submitted that Potter J applied the standard of proof and onus that this Court has held to be the appropriate approach to s30 of the Act in Meridian Global Funds Management Asia Ltd v Securities Commission [1994] 2 NZLR 291, 296.

  34. Section 30 confers jurisdiction on the Court to make a range of orders under s32 where there are reasonable grounds to suspect that a substantial security holder has not complied with the disclosure requirements of the Act. With respect to Keith J we consider that the reasonable grounds to suspect qualifies both whether a person is a substantial security holder and whether there has been non-disclosure. This is clear in our view on the wording and because that interpretation accords with both the policy behind the legislation and with precedent – see for example Meridian at 296 and Securities Commission v Honor Friend Investments Ltd (1991) NZCLC 67, 512, the first instance judgment in Meridian.

  35. In Meridian this Court endorsed the approach to s30 that the High Court had taken in that case. The High Court had operated on the basis that, while the existence of the relevant interest must be established only to the extent of a reasonable suspicion, the facts on which the suspicion was founded require proof to the usual civil standard of the balance of probabilities. The Court said at 296:

    The powers conferred on the Court by s32, which extend to depriving an offender of many of the rights of a shareholder, even of the shareholding itself, are extensive and potentially Draconian, yet are exercisable merely on "reasonable grounds to suspect". Heron J approached his task on the footing that while the existence of the "relevant interest" had to be established only to the extent of reasonable suspicion, the facts on which the suspicion was founded required proof to the usual civil standard, that is, on the balance of probabilities. We consider that to be the correct approach. Except in the event, unlikely in a disputed case, that there is direct proof, interest can be established only by the process of inference. It is to that process to which the words "reasonable grounds to suspect" relate. Inferences may be drawn only from facts, and the statute does not depart from that fundamental. But once the facts are established, the statute requires the less stringent process of deduction on the basis of reasonable suspicion, which would not be enough in an ordinary civil case, to say nothing of a criminal case.

  36. The phrase "reasonable grounds to suspect" or "reasonable cause to suspect" is a phrase that has been used in a variety of legislative contexts, including the Antiquities Act 1975, Customs and Excise Act 1996, Arms Act 1983, Passport Act 1992 and the Crimes Act 1961. In many cases it sets the threshold for beginning a process. For example, if a customs officer has reasonable cause to suspect that a person arriving in New Zealand and entering into a Customs port or airport has hidden any dutiable or prohibited goods on his or her person, the officer may cause that person to be detained and searched (s149 Customs and Excise Act). Similarly a member of the Police who has reasonable grounds to suspect that a person is carrying a firearm in a public place in breach of the Arms Act may, without warrant, search that person, detain them for the purpose of the search and seize any such firearm found (s60 Arms Act). In other cases it can be seen as an ingredient of an offence. For example, s31 of the Passport Act prescribes an offence of using a New Zealand passport for the purpose of travel and without reasonable excuse knowing or having reasonable cause to suspect that it has expired or been cancelled.

  37. Where "reasonable cause to suspect" is a threshold issue this Court has held, in Police v Anderson [1972] NZLR 233 in the context of the then breath testing regime, that whether an officer has reasonable cause to suspect that a person is driving while under the influence of alcohol is a question of fact to be proved to the civil standard of the balance of probabilities. It has also been held that the officer may consider, according to its weight, all relevant material before him or her, whether derived from personal observation or inquiry or hearsay reports alone – see Police v Cooper [1975] 1 NZLR 216, 221.

  38. Unlike in most of the contexts discussed above, under the Securities Markets Act there is no further process to be undertaken. If reasonable grounds to suspect are found then jurisdiction exists to make orders under s32. In these circumstances to require proof merely on the balance of probabilities that there are reasonable grounds to suspect would lower what is already a low threshold. We consider, therefore, that the phrase "reasonable grounds to suspect" in s30 in itself sets the standard of proof required.

  39. A requirement that there be "reasonable grounds to suspect" or "reasonable cause to suspect" is obviously lower than the ordinary civil standard of proof. It is lower than that required for the issue of a search warrant under s198 of the Summary Proceedings Act. Section 198 requires the issuing judicial officer to be satisfied that there is "reasonable ground for believing" that in the place to be searched there is evidence as to the commission of an offence. Any such belief must go beyond mere suspicion so that the judicial officer must have the belief that the state of affairs in question actually exists - see R v Sanders [1994] 3 NZLR 450, 461. Fisher J also in that case expressed the view that even suspicion:

    probably goes beyond mere recognition that something is possible to the point that, while final judgment must be suspended pending proof, the proposition in question is regarded as inherently likely.

  40. We consider that in the present context the term "suspect" means what it says. Whether the grounds of suspicion are reasonable must, however, be judged objectively from the viewpoint of an informed market observer. This means that it is nevertheless a low standard. In our view a court must, under s30, assess whether on all of the admissible evidence, including that adduced by the defendant and on the basis of both primary facts and inferences, the case is proved to the requisite standard, being the standard of "reasonable grounds to suspect".

  41. The question remains whether all primary facts must be proved to the ordinary civil standard as this Court appeared to be suggesting in Meridian. We do not think that this Court in Meridian was suggesting an absolute rule to that effect. Even in cases where the standard of proof is the ordinary civil standard of balance of probabilities, that standard does not apply to each individual primary fact or inference. It applies to the evidence as a whole. The Court in Meridian was in our view merely making it clear that the more serious the order being considered, the firmer the basis for the suspicion must be. As pointed out in Meridian, the orders that can be made under s32 are wide-ranging. They range from orders directing compliance with disclosure obligations to potentially draconian penalties, such as orders to dispose of shares and forfeiture orders. We consider (despite the way the point was phrased) that the Court was merely endorsing the High Court approach as appropriate in the circumstances of that case. This was in the context of the seriousness of the allegations involved and the nature of the penalties being considered.

  42. Indeed, in our view it would seldom (if ever) be appropriate to impose the more draconian orders (at least on a final basis) unless the court were satisfied on the balance of probabilities that there had been non-disclosure of a relevant interest by a substantial security holder. Potter J made this point at para [26] of her judgment, quoting from William Young J in Richmond v PPCS (2003) 9 NZCLC 263, 115 at para [25] where he said:

    The reasonable grounds to suspect jurisdictional threshold is obviously appropriate to a number of the orders which can be made by this Court under s32, particularly orders which are of an in-substance interlocutory nature. In practical terms, however, it seems inherently unlikely that a Court would make an order with a substantive effect (e.g. forfeiting shares) unless satisfied that it was at least more likely than not that a particular breach had occurred.

  43. The next question is which party bears the burden of proof in a case under s30 of the Securities Markets Act. This Court in Meridian said that, although the burden of proof resting on the plaintiff would be satisfied by establishing reasonable grounds to suspect the acquisition of a relevant interest, the suspect could counter this by establishing, on the balance of probabilities, that no such interest had been acquired. It said at 296:

    This does not mean that an alleged offender must dispel all suspicion in order to be acquitted of a breach of the Act. It means rather that the Commission will satisfy the burden of proof resting upon it by establishing reasonable grounds to suspect the acquisition of a relevant interest. The suspect may counter the allegation by establishing, on the balance of probabilities, that no such interest has been acquired. If that is done, there will no longer be reasonable grounds to suspect the contrary.

  44. It is useful at this stage to distinguish between the various burdens that can arise in a case. Professor Williams has recently pointed out in his article "Burdens and Standards in Civil Litigation" (2003) 25 Syd LR 165 that the phrase "burden of proof" is used in two quite distinct senses. He says, quoting from the American scholar, James B Thayer A Preliminary Treatise on Evidence at the Common Law (1898) at 355, that in one sense it means:

    The peculiar duty of him who has the risk of any given proposition on which the parties are at issue – who will lose the case if he does not make this proposition out, when all has been said and done.

  45. Professor Williams adopts the term "the legal burden" to describe this burden. It has also been described as the "fixed burden", the "probative burden" and the "burden of persuasion". The second sense in which the phrase is used is defined by Thayer as:

    the duty of going forward in argument or in producing evidence, whether at the beginning of a case or at any later moment throughout the trial or the discussion.

  46. This is usually referred to as the evidential burden. As pointed out by Professor Williams (at 169), there are legal rules which determine in respect of any issue in a case where the legal and evidential burdens lie. These burdens arise at different points in a trial. As Professor Williams says (at 167):

    Where the question is whether a no case submission should be accepted, or whether a particular issue should be left to the jury or considered by the judge in a case tried by judge alone, it is the evidential burden which is in issue. Where the question is what should be done if, at the end of the day, the tribunal is unsure where the truth lies, it is the legal burden that is in issue.

  47. There is a further complication. The term "evidential burden" is used to refer to two quite distinct notions. In the first sense it means the burden of adducing evidence on an issue on pain of having the trial judge determine the issue in favour of the opponent. This is a question of law. The second sense in which the phrase is used refers to the burden resting upon a party who appears to be at risk of losing on a given issue at a particular point in a trial. This merely involves a tactical evaluation of who is winning at a particular point which can obviously shift depending on the trial dynamics. It has been called the "tactical burden" or the "provisional burden". We will use the first of these phrases, being the one Professor Williams (at 168) favours.

  48. In this case we accept Perry Corporation’s submission that there is nothing in the Securities Markets Act to suggest that the legal and evidential burdens do not lie on a plaintiff. It is for the plaintiff to establish that there are reasonable grounds to suspect that a substantial security holder has not complied with the disclosure requirements. There is no legal or evidential burden on a defendant. We do not consider, however, that the Court in Meridian was suggesting otherwise. It was in our view referring only to the tactical burden when it made the remarks quoted at para [43] above.

  49. The Court was concerned in Meridian with setting the standard necessary for holding that it has not been shown that there are reasonable grounds to suspect. It is not necessary that all suspicion be dispelled. If a trial judge is satisfied on the balance of probabilities that there is or was no non-compliance by a substantial security holder, then that is sufficient to dispel any reasonable suspicion – or, putting it in terms of the legal rather than the tactical burden, that it has not been proved that there are reasonable grounds to suspect. This assessment would obviously have to be made on the basis of all of the evidence, including that put forward by the defendant.

  50. The Judge in this case followed the correct approach in that she considered first whether on all of the evidence there were reasonable grounds to suspect that an arrangement or understanding existed. She may have considered some of the Perry Corporation evidence (in particular that of Mr. Cohen of Deutsche Bank and Mr. Gray of UBS Warburg) as neutral but she clearly considered it. She then went on to consider specifically whether the Perry Corporation evidence showed on the balance of probabilities that there was not an arrangement. This assessment must be made on the basis of all of the evidence and she did in fact consider all of the evidence in coming to her final conclusion at para [222]. There she stated that she was satisfied on the balance of probabilities that there had been an arrangement.

  51. To summarise, what is required in order to invoke a court’s jurisdiction to make orders under s32 is that, on all of the evidence, there are reasonable grounds to suspect non-compliance by a substantial security holder. That is the standard of proof set by the legislation. On the other hand, the more draconian a penalty that is to be imposed, the firmer the basis for suspicion must be. In the case of the most severe orders such as forfeiture, it will seldom, if ever, be appropriate to impose such penalties if the normal civil standard of proof is not satisfied. Finally, there can be no reasonable grounds to suspect if the court is satisfied on the balance of probabilities that there is or was no non-compliance by a substantial security holder.

    WAS THERE AN ARRANGEMENT OR UNDERSTANDING?

    SUBMISSIONS OF THE PARTIES

  52. Perry Corporation submitted that, while Potter J correctly concluded that a cash-settled equity swap contract documented by the standard ISDA agreement does not create a relevant interest as defined in s5 of the Securities Markets Act, she incorrectly concluded that there was an arrangement or understanding between Perry Corporation and Deutsche Bank and UBS Warburg respectively for Perry Corporation to repurchase the shares held as a hedge.

  53. In Perry Corporation’s submission the Judge failed to recognise that it was inherent in the nature of an equity swap that a party in Perry Corporation’s position would be confident that on unwind it could establish an equivalent physical shareholding. It therefore had no need to enter into any supplementary arrangements which would have in any case been inconsistent with the documentary safeguards and management controls exercised by Deutsche Bank and UBS Warburg. Perry Corporation submitted that the Judge was wrong to describe the evidence of Mr. Cohen of Deutsche Bank and Mr. Gray of UBS Warburg in this regard as neutral when it was essential to understanding the normal expectations of parties in equity swaps and the controls imposed by Deutsche Bank and UBS Warburg.

  54. GPG did not challenge the finding that cash-settled equity swaps per se do not create disclosure obligations. Indeed it says that it never asserted that they do. Its argument always was that there were actual arrangements or understandings in relation to the shares held as a hedge by the banks whereby Perry Corporation could repurchase those shares if it wished to do so. As an alternative, it argued that, even if such arrangements were not articulated, the very inevitability asserted by Perry Corporation means that in the particular circumstances there were s5(1)(f) arrangements or understandings through the mere entry into the equity swaps.

  55. Rubicon took issue with certain adverse inferences the Judge drew from the evidence in relation to Rubicon’s state of knowledge, and in particular the Judge’s conclusion that Rubicon believed that Perry Corporation had the ability and the power to repurchase the shares if necessary. In Rubicon’s submission this contradicts the finding that Rubicon believed that Perry Corporation did not have a relevant interest. The inferences drawn are adverse to Rubicon’s interests because a power to repurchase would give rise to a relevant interest and this would suggest that Rubicon was aware both of the relevant interest and that Perry Corporation had breached its disclosure obligations which, in Rubicon’s submission, was not the case.

    ISSUES

  56. The issues therefore are:

    1. whether the mere entry into these particular equity swaps constituted an arrangement or understanding in terms of s5(1)(f) because of the inevitability of the Rubicon hedge shares being available for repurchase; and

    2. if that question is answered in the negative, whether the Judge was correct to hold that there was an actual arrangement or understanding in relation to the Rubicon hedge shares.

    INEVITABILITY OF AVAILABILITY FOR REPURCHASE?

  57. The first issue is whether the entry into these particular equity swaps constituted an arrangement or understanding with the respective counter-parties because of the inevitability of the hedge shares being available for repurchase. As Potter J rightly held (at para [64]), entry into a cash-settled equity swap per se cannot constitute an arrangement or understanding to which s5(1)(f) applies. If there is such an arrangement or understanding it must relate to any shares held by the counter-parties as a hedge. In this case the swaps were cash-settled but both Deutsche Bank and UBS Warburg held Rubicon shares as a hedge and indeed Perry Corporation sold those shares to the banks at the same time as entering into the swaps transactions. This means that Perry Corporation could be sure that, at least initially, the banks would hold Rubicon shares as a hedge. The first question is whether it was inevitable that the Rubicon shares would be held as a hedge for the duration of the swaps.

  58. In the case of Deutsche Bank Mr. Cohen said in evidence that the form of hedge would be decided on a case by case basis and would not necessarily be static throughout the term of the swap. He said, however, that in the case of an equity swap in respect of a stock like Rubicon, which is neither large nor liquid, it is likely but not necessary that the hedge would be in a holding of the underlying shares themselves. That was the decision taken in this case. Mr. Cohen said in evidence that the Rubicon shares were the natural hedge to the swaps and a purchase from Perry Corporation was the quickest, easiest and cheapest way for the bank to acquire such shares.

  59. Mr. Gray of UBS Warburg said that, although there are different options available to hedge swaps transactions, as a matter of policy the bank would generally hold matching shares as a hedge. This is because it is operationally and administratively simple in that there is no need constantly to review the holding to ensure that the obligations under the swaps are covered. This would particularly be so where, as was the case with Rubicon, the underlying shares are relatively illiquid, have a relatively small capitalisation and are not easily matched by similar shares. We also remark that the termination price of the UBS Warburg swaps was the price at which the hedge was unwound. It is difficult to see how this could be calculated if UBS Warburg did not hold Rubicon shares as a hedge at termination. We note at this point, however, that even if, as GPG asserts, this constitutes an agreement to hold those shares as a hedge (and we doubt it would be construed in this manner) it certainly is not a commitment to allow repurchase by the counter-party.

  60. From this evidence we conclude that, if not inevitable, it was almost certain that Rubicon shares would be held by both counter-parties as a hedge for the duration of the swaps.

  61. Mr. Gray indicated, however, that UBS Warburg is free to use shares it holds as a hedge for it own purposes, in order to generate additional revenue. Mr. Cohen gave similar evidence in relation to Deutsche Bank. Shares held as a hedge can be used for stock lending transactions with other clients, traded internally within the bank, or used as collateral on transactions entered into by the bank. There was thus a possibility that the hedge shares would not be available on demand as they could be used for other purposes such as securities lending. There was no evidence given of actual demand for the Rubicon shares to be used for other purposes but presumably there was the possibility of parties selling short into the Rubicon buy-back, as Perry Corporation did, or indeed selling short into the GPG book-build. This could have created a possible demand.

  62. On the other hand, we note the illiquid nature of the Rubicon shares and small market capitalisation, which must reduce the likelihood of the shares being used for other purposes. We also remark that committing the shares to other purposes for any length of time would have restricted the ability of the banks to manage the unwind of the hedge in the event of an early termination of the swaps. In UBS Warburg’s case an early termination of the swaps could take place on three days notice. While the early unwind period was 60 days for Mr. Cohen, his evidence was that, in practice, Deutsche Bank endeavoured to give their client counter-parties maximum flexibility, which accordingly meant that most terminations of equity swaps were by arrangement rather than as documented. These factors suggest that it would be almost certain (in UBS Warburg’s case) and highly likely (for Deutsche Bank) that the shares would be available (at least within a short timeframe) for the duration of the swaps.

  63. The next question is whether the hedge shares would inevitably have been available for purchase by Perry Corporation if it wished to do so. The first point is that the banks would be willing to sell only if the swaps were terminated at the same time, as otherwise the banks’ position under the swaps would be unhedged. Assuming that the swaps were to be terminated, the evidence was that a sale to the counter-party would be administratively the most convenient means of disposal and would reduce transaction costs and risk. We also assume that both banks, to ensure good client relations and repeat business, would wish to accommodate Perry Corporation’s desire to purchase any shares held as a hedge if possible. We are not suggesting that this would be the case only for Perry Corporation. It would apply to any client.

  64. In addition, in the case of UBS Warburg there was no financial incentive to sell to a party other than Perry Corporation as the termination price of those swaps was the price at which the hedge shares were sold. We would have thought this would make it inevitable, in the case of UBS Warburg at least, that the shares would be sold to Perry Corporation upon the termination of the swaps if Perry Corporation wished to buy, provided UBS Warburg held the shares (and we have found that it was almost certain to have done so). Mr. Gray in cross-examination, however, would not accept this proposition. He said that UBS Warburg would not necessarily have sold the shares to Perry Corporation if another party had offered to pay a better price. It is difficult, however, to see why this would be the case as the better price would merely be passed on to Perry Corporation under the terms of the swaps. Mr. Gray may have had in mind a possible credit risk but there is no evidence that this was a concern in relation to Perry Corporation in the relevant period.

  65. In the case of Deutsche Bank, if the unwind had taken place at termination date, there could have been a financial incentive to sell to another party as the termination price for those swaps was the market price at termination. Equally, however, any sale other than to Perry Corporation would have involved the risk that the sale price would differ from that market price, and presumably the reason the bank hedged in the first place was to avoid equity risk. In any event, the termination in this case was an early one and the documentation made provision for that. Mr. Cohen said in evidence that early terminations usually take place by arrangement, with 95% or more of equity swaps transactions being terminated early or rolled past the termination dates specified in the documentation. In such cases the bank generally wishes to match the unwind to the liquidation of any hedge. Where the hedge is a particularly large parcel of shares the bank would seek a method of sale that would not impact on the market too seriously. Mr. Cohen said that in this case it was a natural fit to sell the shares to Perry Corporation (or to sell as many as Perry Corporation wished to buy, which in the event turned out to be fewer than the number of shares the bank held). We note also that it is uncertain whether other buyers would have been readily found in the required timeframe, given the relatively illiquid nature of the stock.

  66. We conclude therefore that it was almost certain that the shares would be sold to Perry Corporation upon the termination of the swaps if Perry Corporation wished to buy, provided the counter-parties held the shares (and we have found in the case of UBS Warburg that this was almost certain and in the case of Deutsche Bank that this was highly likely). We consider that this market reality would have been obvious to any reasonably informed market participant. Mr. Rosen, Head Trader at Perry Corporation, said in evidence that he had always thought it likely that the shares would be held by the counter-parties as a hedge. He also said he had thought that, if he wanted to terminate the swaps and purchase the shares, it would be commercially sound for the equity swaps counter-parties to sell him those shares.

  67. The final question therefore is whether this means, as GPG asserts, that merely entering into these particular swaps transactions constituted an arrangement or understanding to which s5(1)(f) of the Securities Markets Act applies. Also at issue is the meaning of "power" in this context since it must be decided whether, "under or by virtue of" any agreement, arrangement or understanding, Perry Corporation had the power (in any of the circumstances set out in s5(4)) to acquire the Rubicon shares from its equity swaps counter-parties.

  68. The terms "arrangement" and "understanding" are used in trade practices and taxation statutes and have been the subject of extensive case law and judicial and academic comment. We refer in this regard, for example, to the cases of New Zealand Apple and Pear Marketing Board v Applefields Ltd [1991] 1 NZLR 257, 261 (PC), Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450, 465-466 (CA), Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647, 662 (HC), Commerce Commission v Caltex (1999) 9 TCLR 305, 314-315 (HC), Australian Competition and Consumer Commission v CC (NSW) Pty Ltd (1999) 165 ALR 468, 500 (FCA), Trade Practices Commission v Email (1980) 31 ALR 53, 66 (FCA), and Ical Ltd v County Natwest Securities Australia Ltd (1988) 13 ACLR 129, 156 (NSW SC).

  69. It is clear from those cases that the terms "arrangement" and "understanding" describe something less than a formal contract. There may be little to distinguish one from the other except the matter of degree, with an understanding likely to be more informal than an arrangement. What is clear from both the trade practices and the taxation context is that a meeting of minds is required. The meeting of minds embodies an expectation as to future conduct, meaning that there is consensus as to what is to be done. This necessarily involves communication. The communication does not, however, need to be formal or even verbal.

  70. Mr. Asher submitted that communication may be established by observed conduct as part of the wider commercial context, as was held in the case of Re Agreement of the Mileage Conference Group of the Tyre Manufacturers’ Conference Ltd [1966] 2 All ER 849, 859. In that case a group of tyre manufacturers had entered into a scheme that allowed each company, if it wished, to notify the other members of rates they were considering charging under contracts to supply tyres to fleets of motor vehicles. Payment for the tyres related to the miles run by each vehicle. With rare exceptions, which were concealed from other members of the group, all members notified their intended quotations during the life of the scheme, during which time the difference in quotations between companies was minimal. Although the Court accepted that the member companies had acted independently in deciding to use the scheme and that other factors may have contributed to the level tendering, it held that an arrangement came into being as a result of information as to one another’s intentions derived from their actual and continued conduct towards one another. The Court considered that the scheme involved mutual obligations, binding in honour and according with each member’s individual interest because the continuance of the scheme depended on their general observance.

  71. Mr. Galbraith submitted that some caution is required before relying upon such elderly cases. We agree. The case also arose in unusual circumstances. The voluntary scheme replaced a compulsory scheme whereby, among other things, the group had agreed not to tender at mileage rates lower than the lowest price insisted on by any member at a meeting held in accordance with a specified procedure without first notifying the other members. This compulsory scheme had been the subject of a court order which had declared that restrictions on minimum permissible quotations were contrary to the public interest and which had accepted the group’s undertakings not to give effect to the restrictions nor to enter into any arrangement to like effect. The question was whether the new voluntary scheme was in breach of that order. Relevant to this was the fact that the group members had deliberately abstained from informing their fellow members of their decision to enter into the scheme as they understood that this lack of communication would prevent an arrangement from coming into being. The Court stated (at 859):

    The law is not so subtle or unrealistic as to involve the conclusion that, while an arrangement can come into being as a result of information as to one another’s intentions supplied in words or writing or by a nod or a wink, it cannot come into being as a result of information as to one another’s intentions derived from their actual and continuing conduct towards one another.

  72. In the special circumstances of the case, this comment is understandable. In any event, we consider that there was, in fact, actual communication, both as regards the setting up of the voluntary scheme and then communication of the intended quotations. The latter was clearly designed (particularly against the background of the prior compulsory scheme) to ensure that the other members of the scheme behaved in the same manner. There was thus the required consensus and communication.

  73. The analysis which requires communication and consensus for there to be an arrangement or understanding in our view applies equally to the terms as used in s5(1)(f) of the Securities Markets Act. As there must be a meeting of minds and communication, mutual expectations based on commercial reality (but without such consensus or communication) are not sufficient to give rise to an arrangement or understanding – see also on this point Richmond Ltd v PPCS Ltd (2003) 9 NZCLC 263,115 at para [198].

  74. This conclusion is reinforced by the fact that a relevant interest arises under s5(1)(f) when a person has the ability to exercise "power" in relation to the securities. The term "power" involves the notion of domination or command. This necessarily implies an ability on the part of the person who allegedly has the power to bring about the effect desired. We acknowledge that, under s5(4), a power can be express or implied, exercisable presently or in the future or only on the fulfilment of a condition. It also does not need to be legally enforceable. Nevertheless some form of constraint on one party’s actions by the other is required for a power to arise (whether that is enforceable or not) and this necessarily involves communication between the parties.

  75. There is also the further requirement that the power must arise under or by virtue of the arrangement or understanding and not merely as result of its performance – see the discussion by Adrian van Schie in Insider Trading, Nominee Disclosure and Futures Dealing: an Analysis of the Securities Amendment Act 1988 (Butterworths, 1994) 97. In addition, requiring only something less than a consensus before an understanding or arrangement can be said to exist would not be apt in this context because of the low threshold required to invoke the court’s jurisdiction to make orders, being mere reasonable suspicion that a substantial security holder has not complied with the disclosure obligations.

  76. Finally, if we hold that knowledge of market reality suffices to create an arrangement or understanding under s5(1)(f) and that consensus and communication is not required, this would create uncertainty as to the scope of disclosure generally, as it would raise questions about how certain market reality must be before there is an obligation to disclose. In particular it would, in effect, mean that the majority of equity swaps in New Zealand would create disclosure requirements, whether cash settled or not. There are obvious policy issues involved in extending disclosure requirements to interests under equity swaps as the regime conceptually is directed at voting rights rather than economic interests. Most equity swaps create only economic interests. Mr. Cohen estimated that about 85-90% of cash-settled equity swaps are in fact cash-settled. There are also the practical difficulties of possible double disclosure where swap counter-parties hold shares as a hedge.

  77. The evidence from an expert witness on swaps called by Perry Corporation, Mr. Chin Chong Liew, was that, although the legislation differs, disclosure of interests in cash-settled equity swaps is not required in Australia, the USA or, in most circumstances, in the UK. At the time he gave evidence the position was the same in Hong Kong but he indicated that legislation to require disclosure of such swaps had recently been passed and was expected to come into force on 1 April 2003. An article written by Mr. Liew was tendered where he expressed concern that the new regime would reduce the attractiveness of Hong Kong as an investment jurisdiction. We observe that New Zealand would be, without legislative consideration, out of line with a number of other important jurisdictions, if there is a decision that effectively requires disclosure of interests under equity swaps or causes uncertainty as to whether such disclosure is required.

  78. For the above reasons, we reject the GPG submission that an arrangement or understanding exists merely by reason of Perry Corporation entering into the equity swaps with the knowledge and expectation, because of market reality, that there would be an ability to repurchase the shares. There would have to be some form of consensus and communication between the parties, confirming that there would be an ability to repurchase, for there to be an arrangement or understanding in terms of s5(1)(f).

    ACTUAL ARRANGEMENT OR UNDERSTANDING?

  79. Potter J held that there was an actual arrangement or understanding in relation to the possible reacquisition of the Rubicon shares. She said (at para [219]) that she was unable to determine on the evidence the exact terms of the arrangement or understanding between Perry Corporation and Deutsche Bank and UBS Warburg respectively. Nor was she able to determine precisely by whom and how it was reached. However, she was satisfied that there was a consensus or meeting of minds between Perry Corporation and the equity swaps counter-parties that the shares sold by Perry Corporation when the equity swaps were established were held available for repurchase for the duration of the equity swaps. She said that the arrangement or understanding was known at least to Mr. Berg, Mr. Rosen, Mr. Madan and inferentially Mr. Dozier, and that Mr. Berg and Mr. Rosen knew that Deutsche Bank and UBS Warburg would act in accordance with it. As indicated above, in reaching her conclusion, the Judge relied on a number of factors. We examine each in turn.

    AVOIDANCE OF DISCLOSURE

  80. The first was her finding that Perry Corporation entered into the equity swaps in order to avoid the disclosure requirements under the Securities Markets Act. She rejected the explanation that the move to equity swaps was tax driven as Perry Corporation had contended. She also rejected the contention that the concern was to avoid publicity generally, rather than specifically to avoid disclosure under the Act. She said (at para [187]):

    Perry Corporation saw it as in the best interests of their investors that they should be in a position as a major stakeholder in the company, to contribute their expertise and experience towards increasing the underlying value of Rubicon (particularly in relation to Rubicon’s significant stake in Fletcher Challenge Forests though their input covered a wide range of matters), with a view to realising their proportionate share of the gain upon the sale of assets, without the market generally being informed that Perry Corporation assessed it as advantageous to invest substantially in that outcome.

  81. This finding was one clearly available to her on the evidence. We would not, however, see it as strongly indicative of the existence of an arrangement or understanding, although the rejection of Perry Corporation’s explanation may be relevant to an assessment of the general credibility of Perry Corporation’s witnesses. Not being liable to disclose an interest is a consequence of entering into an equity swap. If avoiding disclosure was the primary motive for entering into the swaps this would therefore be a legitimate motive (even if some may argue one which is against the spirit of the legislation). It does not appear to us that such a motive would be any more likely to herald a side arrangement or understanding than if the entry into the swaps were tax driven.

  82. If there had been a reason for Perry Corporation wishing to retain the option of returning to a physical holding, however, this may have indicated the existence of a side arrangement or understanding. In this case Perry Corporation can be seen as being in virtually the same position after entry into the swaps as before. It still had full economic exposure to Rubicon and continued to have influence over management. Indeed, as the Judge noted (at para [146]), the level of Perry Corporation’s liaison with management increased rather than diminished once the swaps were entered into. The Judge considered that this was because some within Rubicon knew of the side arrangement but, as indicated below, we do not consider this to be the case.

  83. The Judge, at para [148], proffered the view that it was highly unlikely that Perry Corporation would have allowed itself to be in a position where it was unable to vote if need be in order to ensure the joint Rubicon/Perry Corporation objectives were not thwarted. She said:

    In making and maintaining their substantial investment in Rubicon, not only in financial terms but in the contribution of experience and expertise, it is in my view highly unlikely that Perry Corporation would have exposed itself and Rubicon to the risk that their mutual objectives could be thwarted by Perry Corporation’s inability to exercise votes in respect of the shares that underlay their economic interest, if a critical situation were to arise as indeed it potentially did.

  84. Mr. Rosen of Perry Corporation, speaking of swaps in general, conceded that the inability to vote could in some circumstances be a disadvantage of holding economic interests through swaps but said that the advantages of swaps outweighed this disadvantage. Mr. Berg, also of Perry Corporation, gave evidence that Perry Corporation had never before found it necessary to return to a physical shareholding in order to vote at a meeting. It is possible, however, that the Rubicon investment was in a slightly different position to many of Perry Corporation’s other investments. Although for Perry Corporation the investment was relatively small in monetary terms, it held a relatively large proportion of Rubicon shares, being over 10% at the time of entry into the swaps. Normally Perry Corporation investments were under 10%. In economic terms Perry Corporation’s exposure had risen to over 15% by June 2001. There was also evidence from Mr. Moriarty that Perry Corporation had a slightly negative view of Fletcher Challenge in general. These factors, however, have to be weighed against the background of an almost certain ability to repurchase the shares in any event and the continued influence over management enjoyed by Perry Corporation as discussed above.

  85. In addition, there does not seem to be any suggestion that there was dissension among the shareholders of Rubicon at the time of entry into the equity swaps such that it would have seemed necessary to Perry Corporation to ensure an ability to return to holding the physical shares. There was evidence that the early venture capital stance of Rubicon had caused initial concern, but that Rubicon had decided, before Perry Corporation entered into the swaps, that the better short term strategy was to unlock shareholder value by the disposal of non-core assets. This was a strategy Perry Corporation agreed with. Dissension among shareholders did arise later (around May 2002) in relation to the Fletcher Forests’ transaction but even that was unexpected to Perry Corporation. Mr. Berg explained that he had thought that any economically rational Rubicon shareholder would see the value created from the deal. The first Rubicon shareholders’ meeting was also not held until 19 July 2002 which was some 15 months after Perry Corporation’s entry into the swaps.

  86. For completeness, we note that Mr. Rosen also gave evidence that, in general, holding an investment through swaps does not limit the ability to make a separate sale of shares. If the opportunity arises to sell a large block of stock at a profit Perry Corporation does not need to own the stock to enter into the transaction because it can borrow stock from its prime brokers and sell the borrowed stock short. The short position would be hedged by the economic long position under the equity swaps. Shares can also be purchased in the market with the swaps providing a hedge against increases in the share price.

  87. No other reason has been suggested for Perry Corporation wishing to ensure an ability to return to a physical shareholding.

    RUBICON TREATED PERRY CORPORATION AS A MAJOR SHAREHOLDER

  88. The second factor relied on by the Judge was the fact that, throughout the relevant period, Rubicon treated Perry Corporation as being a substantial shareholder. She pointed out that, without exception or qualification and for more than a year, Perry Corporation was described in board papers, minutes and internal memoranda as a "major shareholder, "our second largest shareholder", and as "owning the shares". Perry Corporation also had ongoing input into the management and direction of Rubicon.

  89. Potter J did not accept that this description and treatment arose simply because of Perry Corporation’s economic exposure to Rubicon pursuant to the equity swaps. She considered that, from a company’s perspective, there is a very real difference between a holder of an interest who may exercise voting power and an investor who has taken a bet on the company’s performance (as she put it). Rubicon treated Perry Corporation as a major shareholder and accordingly did not recognise that status for Deutsche Bank and UBS Warburg although they had filed substantial security holder notices disclosing relevant interests in the same shares as supported Perry Corporation’s major shareholder status.

  90. Rubicon’s treatment of Perry Corporation as a major shareholder was, for Potter J, amply demonstrated by Mr. Moriarty conceding, in the course of cross-examination, that he did not see Perry Corporation’s entry into the swaps as a sale. Potter J also considered it significant that Deutsche Bank and UBS Warburg were not considered as major shareholders in relation to the buy-back when they had an absolute discretion in relation to disposal and dealing with the shares. In contrast, serious note was taken of Perry Corporation’s likely participation in the buy-back, which for the Judge made sense only if Rubicon relied on the fact that Perry Corporation could and would make any decisions to sell in relation to the shares held by the swap counter-parties.

  91. From these factors and the close working relationship that had developed between Rubicon and Perry Corporation she inferred that Rubicon would have been given by Perry Corporation to understand and believe that Perry Corporation had the ability and power to re-acquire the Rubicon shares if and when the need arose.

  92. Mr. Asher submitted that the Judge’s view of the situation was clearly correct. In the absence of other information it could have been expected that Mr. Moriarty and Mr. Taylor would have relied on Deutsche Bank’s and UBS Warburg’s substantial security holder notices as recording the true position, whereas in fact they were able to record precisely Perry Corporation’s resulting interest as "owner" of Rubicon shares with every change in its position with the swaps counter-parties. Potter J, in his submission, was entitled to reject Mr. Moriarty’s explanation that Perry Corporation’s description and treatment as a major shareholder arose simply through its economic exposure to Rubicon and instead find that it arose because of Mr. Moriarty’s belief, inevitably via Perry Corporation, that Perry Corporation could regain the shares when necessary. This belief was evident from Mr. Moriarty’s admission that he did not consider that Perry Corporation had sold its shares and from the fact that the swaps counter-parties were not accorded shareholder status in internal papers or identified as potential sellers into the buy-back. Mr. Moriarty had eventually conceded that a mere equity swap investor is not a shareholder so there had to be something more to explain the way in which Perry Corporation was described and treated. This something more was, in Mr. Asher’s submission, that, as the trial judge found, Perry Corporation had the power to re-acquire the underlying shares at any time.

  93. On behalf of Rubicon, Mr. Farmer QC pointed out that the Judge’s finding is inconsistent with her finding that Rubicon had made appropriate inquiries and that its management and Board accepted that Perry Corporation was not in breach of its disclosure obligations – see para [152] of her decision. Mr. Farmer submitted that it was natural that Perry Corporation, given its investment philosophy and the size of its economic exposure to Rubicon, would continue to have an interest in improving the value of Rubicon’s shares. It was equally natural that Deutsche Bank and UBS Warburg, with no economic exposure to Rubicon, would not have the same interest in how Rubicon performed.

  94. He submitted that, because of these factors, it was understandable that Rubicon continued to treat Perry Corporation in the manner it did. This is particularly in light of the fact that Perry Corporation appeared to be acting as a de facto spokesperson for other offshore institutional investors. He further submitted that the description of Perry Corporation as a major shareholder was contained only in internal company documents with a circulation to people who were fully aware of the equity swaps. While he accepted that a company would have a concern as to voting interests, he pointed out that it was not until the end of the 15 month period under review that Rubicon even had a shareholder meeting and hence anything to vote on. Mr. Farmer submitted that the fact that Mr. Moriarty said that he did not see Perry Corporation’s entry into the equity swaps as a sale merely showed that he recognised that, after the sale, Perry Corporation maintained the same economic interest it had prior to the sell down. In regard to Rubicon’s interest in Perry Corporation’s participation in the buy-back, Mr. Farmer submitted that it was not illogical for Rubicon to take account of Perry Corporation’s views in relation to the buy-back. It was not unreasonable for Rubicon to expect that, as a practical matter, the banks were unlikely to participate in the buy-back if they believed that Perry Corporation would not participate, because they would otherwise be leaving themselves open to an unhedged exposure to Rubicon’s share price performance.

  95. We accept Mr. Farmer’s submissions. With respect to the Judge, we would not attach the weight she did to the description in the Board papers of Perry Corporation as a shareholder. The terminology is in our view explicable as merely a convenient shorthand in a context where all recipients were clearly aware of the true situation. The evidence was that Perry Corporation wished to remain involved and that throughout the period it sought to provide assistance, including for example providing details of potential forest investors. It had full economic exposure to the performance of Rubicon and was seen as being influential with other offshore institutional investors.

  96. We note too that Perry Corporation remained a shareholder throughout the relevant period, holding physical shares in Rubicon ranging from a 1% to a nearly 5% shareholding. To this extent then the description of Perry Corporation as a shareholder was legally correct. Mr. Rosen explained that it was Perry Corporation’s policy to hold a fairly significant portion of its investment in physical shares to enable sale if necessary without shorting the relevant stock (and in some jurisdictions there are restrictions on this). In addition, although we place little weight on it, Perry Corporation believes it important in all markets to be a shareholder of record to obtain all information generally made available to shareholders.

  97. In the circumstances, we consider that it would have been rather surprising if the Rubicon management had treated Perry Corporation as being unimportant to it. Indeed, the reality of the commercial world is that companies must take into account the interests of a number of stakeholders. Depending on the circumstances the voting shareholders may not even be the most important group.

  98. We also comment that Perry Corporation’s active approach to its investments, even when in the form of swaps, is likely to distinguish it from many institutional investors. This active approach is consistent with the level of knowledge held by Rubicon of Perry Corporation’s exact interest in Rubicon at any time. Mr. Moriarty and Mr. Taylor both said in their evidence that Mr. Berg was quite open with them in relation to Perry Corporation’s economic exposure and provided them with details of any changes.

  99. By contrast, Deutsche Bank and UBS Warburg (because of the swaps) had no economic exposure to Rubicon arising out of the hedge shares. Rubicon was aware of this. It is therefore unsurprising that they were not treated as major shareholders. In addition, they were unlikely to vote the shares. Mr. Cohen and Mr. Gray said in evidence that the banks would only vote any hedge shares if the value of the swaps were likely to be affected and the issue clear cut. Mr. Cohen, said, for example, that Deutsche Bank would have been unlikely to vote at the 27 August meeting which had been scheduled to put the Fletcher Challenge Forests proposal to Rubicon shareholders (but which, in the event, did not take place because Fletcher Forests shareholders declined to give the required 75% approval for the proposal to proceed). This was because there appeared to be strong and dissenting views in the marketplace, including those of GPG, on the effect the vote would have on the company. Mr. Cohen said that, unless Deutsche Bank saw a direct economic outcome from the vote which would affect the swaps or a direct benefit to the bank, it would probably have abstained from voting.

  100. We also accept that it was reasonable for Rubicon to expect that the banks would not sell the shares held as a hedge for the equity swaps into the buy-back as that would defeat the purpose of the hedge. UBS Warburg did in fact sell other Rubicon shares into the buy-back and Potter J accepted Mr. Gray’s explanation that the remaining 17 million shares were retained for hedging the swaps rather than because they were needed to comply with an arrangement or understanding that the shares would be held for the duration of the swaps.

  101. It was also clear from the evidence that the Rubicon management was concerned about the position of Perry Corporation and whether it gave rise to a disclosure obligation. As pointed out by Mr. Farmer, despite Perry Corporation’s confirmation to Rubicon that the equity swaps did not require disclosure, Rubicon management nevertheless issued a formal notice under s29 of the Securities Markets Act requiring Perry Corporation to disclose the number of shares in which it held a relevant interest. Similar notices were issued to Deutsche Bank and to the UBS Warburg nominee company. Management telephoned to verify the responses given by the banks and spoke on a number of occasions to Perry Corporation to confirm the position. Further s29 notices were issued on a quarterly basis and Mr. Moriarty sought and received legal advice on the matter.

  102. If, as the Judge found, the primary motivation of Perry Corporation for entering into the equity swaps was to avoid the disclosure requirement, it appears highly unlikely that it would reveal to the management of Rubicon (who were clearly very anxious about the disclosure requirements) the existence of an arrangement or understanding that meant disclosure was required. This is especially the case as it was clear that the Rubicon management would have preferred disclosure. Mr. Moriarty said in evidence that he would have seen value in having Perry Corporation identified publicly as a major shareholder of Rubicon.

  103. In addition, it seems highly unlikely that Mr. Moriarty, who is legally trained, would have received such information without realising its significance in relation to the disclosure requirements. If he did receive information about an arrangement or understanding it must be assumed that he was complicit in Perry Corporation’s failure to disclose, despite his apparent concern about this question. It also appears that he must have concealed such information from the Board. Two of the Rubicon directors, who had given evidence that they were satisfied Perry Corporation had no disclosable interest, were not even cross-examined as to whether they were aware of the existence of an arrangement. Mr. Moriarty would no doubt have realised that he would face disciplinary action if his knowledge of an arrangement had come to light. It appears to us unlikely that he would take such a risk, in circumstances where it is difficult to see the advantage of concealment.

  104. We also point out for completeness that, even if Perry Corporation had told the Rubicon management that it could reacquire the shares if necessary, this was not necessarily a matter of disclosing a side arrangement or understanding. It could merely have been the articulation of the market reality we have discussed above. In any case, as Mr. Galbraith pointed out, it was never put to Mr. Berg that he told Mr. Moriarty that Perry Corporation could get the shares back.

  105. An appellate court is always reluctant to depart from findings of fact based on an assessment of the evidence given before the trial judge. It is less reluctant to do so where the question is as to the proper inferences that can be drawn from established facts: see Nomoi Holdings Ltd v Elders Pastoral Holdings Ltd CA 79/00, 17 July 2001, para [5]. In relation to Rubicon’s treatment of Perry Corporation as a major shareholder we have differed from the findings of the Judge. Although Potter J clearly did not accept Mr. Moriarty’s explanation and thus can be seen as having made adverse credibility findings in his regard, the reason she rejected his explanation was because of the inferences she drew from the facts, such as the close working relationship between Perry Corporation and the Rubicon management and the description of Perry Corporation in the Board papers. For the reasons set out above, we do not consider those inferences to be warranted.

    PERRY CORPORATION'S CONFIDENCE THAT IT COULD REPURCHASE THE SHARES

  106. The third factor relied on by the Judge was Perry Corporation’s confidence that the shares would be available for repurchase when they were needed for the Rubicon annual general meeting. She pointed out that, having decided that Perry Corporation needed to be in a position to vote the Rubicon shares at the 19 July 2002 annual general meeting, Mr. Berg instructed Mr. Rosen to terminate the equity swaps and purchase shares in an amount equal to Perry Corporation’s economic interest. Although urgency was a crucial factor, Mr. Berg did not raise with Mr. Rosen whether there would be any difficulty or delay in acquiring the shares. She also pointed out that Mr. Rosen, too, assumed that the Deutsche Bank and UBS Warburg shares would be available for repurchase. Such confidence was in her view indicative of an arrangement.

  107. We do not see this factor as necessarily indicative of the existence of a side arrangement or understanding. As we have found earlier, the market reality was that the shares would almost certainly be available for repurchase. Mr. Rosen’s evidence that he had a reasonable expectation that the shares would be available was consistent with his understanding of that market reality. Even though he was reluctant to concede it, Mr. Berg must also have been aware of this market reality.

  108. Part of Mr. Berg’s reluctance to concede this point could be explicable on the basis that he must have been conscious that Perry Corporation was in effect countering three arguments. The first was that the inevitability of repurchase in itself created an arrangement. Perry Corporation’s counter-argument was first that there was no such inevitability (at least in relation to the vast majority of swaps) and second that it did not matter if there was. The inevitability was a function of market reality, in particular as regards swaps with illiquid stocks as the underlying shares. The second argument, that s5(2) applied, raised similar issues to the first. The third was that there was an actual arrangement. For Perry Corporation to counter this, it had to stress the very high likelihood (although not necessarily inevitability) of availability for repurchase of the Rubicon hedge shares. The subtleties of the distinctions required could have led to the appearance of inconsistency. The same comments apply to the evidence of Mr. Cohen and Mr. Gray.

    MR. MORIARTY'S CONFIDENCE THAT PERRY CORPORATION COULD REPURCHASE THE SHARES

  109. The fourth factor relied on by the Judge was Mr. Moriarty’s confidence that Perry Corporation could repurchase the shares. After GPG’s share acquisition Rubicon had sought a meeting with GPG, which took place on 8 July 2002 (NZ time, 8.00 am: NY time, 7 July 2002 4.00pm). Over the weekend of 6-7 July Mr. Moriarty had spoken with Mr. Perry and Mr. Berg who had asked him to ascertain GPG’s attitude to the Fletcher Forests’ proposal and whether GPG knew that Perry Corporation had a significant interest in Rubicon. Mr. Moriarty reluctantly agreed to do this.

  110. The parties differ as to exactly what was said at the meeting but it is clear that GPG was told that Perry Corporation had, for over a year, been closely involved with Rubicon’s management and direction and that it was committed to the Fletcher Forests’ proposal to acquire CNIF. After that meeting, but before the Rubicon Board meeting at noon, Mr. Moriarty called Mr. Berg and they spoke for 20 minutes (NZ time, 8 July 2002, 11.36am: New York time, 7 July 2002, 7.36pm).

  111. That afternoon (NZ time, 8 July 2002, 4.21 pm: New York time, 8 July 2002, 0.21 am), via email, Mr. Moriarty told Mr. Berg that, now GPG was aware of the situation, Perry Corporation should announce "it" to the market before GPG did. The email said:

    Will wait until u are ready, but now that someone else [GPG] knows u should not delay too long to ensure u are the ones that announce it first!

  112. Potter J found that the "it" in that email referred to the shares that Perry Corporation was to acquire. She rejected as "unconvincing" Mr. Moriarty’s evidence that the "it" was Perry Corporation’s economic exposure to Rubicon through the swaps. She said that it was implicit in Mr. Moriarty’s email that he knew that Perry Corporation would acquire the shares, information he could only have gained from Perry Corporation. She had earlier noted that Mr. Berg, in answer to a question from her, had said that he had thought that the "it" referred to the fact that Perry Corporation was going to acquire the shares.

  113. The first point is that it is clear that GPG was not told at the 8 July meeting that Perry Corporation was going to reacquire the Rubicon shares. This means that the reference in the email to what GPG knew cannot have been a reference to the reacquisition of the shares. The second point is that the Judge accepted (despite there having been some doubt from the telephone records as to whether there had been telephone communications between 8 July and 10 July, NZ time) that the decision to reacquire the shares was not conveyed to Mr. Moriarty until sometime around 9/10 July (NZ time) and thus after the email had been sent – see para [206](a) of her judgment. Mr. Asher submitted that this finding was made in a different context and was thus irrelevant but this does not appear to us to be the case.

  114. Even if Mr. Moriarty had known about an arrangement whereby the shares could be reacquired, if he did not know of the decision to reacquire the shares when he sent the email, then it is difficult to see why "it" would be referring to the reacquisition of the shares. The fact that Mr. Berg may have thought, when giving evidence long afterwards, that "it" was referring to the reacquisition of the shares, may have been a function of the fact that Mr. Berg recollected that he had been contemplating (or had decided upon) reacquisition at the time of receiving the email (which presumably, given the time differences between New Zealand and New York, is likely to have been read some time after it was sent). It may, however, as Mr. Farmer points out, merely have indicated confusion as to what email was being referred to (and he did appear confused on that point while being questioned by counsel for GPG).

  115. Mr. Asher submitted that, by the time the email was sent that afternoon, Mr. Moriarty knew what was to happen, Mr. Moriarty having spoken to Mr. Berg after the meeting and before the email was sent. However, even if the "it" did refer to the re-acquisition of the shares and the decision to reacquire had been, as Mr. Asher suggested, conveyed in the 8 July telephone call with Mr. Berg, this does not necessarily show knowledge of an antecedent arrangement on Mr. Moriarty’s part. It may equally merely have shown knowledge of Perry Corporation’s current intention to unwind the swaps and acquire the physical shares.

  116. Potter J also referred to a draft press release of 9 July 2002 (NY time 10.28am: NZ time, 10 July 2.28am) sent by Mr. Berg to Mr. Moriarty which stated that Perry Corporation had been a substantial stakeholder in Rubicon since its inception with its economic interest held primarily through equity swaps. It went on to say that "in light of recent events" Perry Corporation felt it was important for it to convert its economic interest into a direct ownership position "in order to support management’s position on upcoming votes." Potter J pointed out (at para [155]-[157]) that, although Mr. Berg had denied in cross examination that the draft presupposed that Perry Corporation owned the shares, he also said, at the time of sending the draft, that it was a "near final draft" and he had not deemed it necessary to add any qualification that its release was subject to the ability of Perry Corporation to acquire the shares. Potter J said (at para [157]) that this was "no doubt because, as [Mr. Berg] acknowledged in evidence ‘we were going to acquire the shares’". In Mr. Asher’s submission it was the degree of Perry Corporation’s confidence conveyed by its actions that Potter J found went beyond simple reliance on market reality.

  117. We do not see that the draft press release is significant. We note that Mr. Berg had, by this time, made the decision to acquire the shares, had instructed Mr. Rosen in this regard and in cross examination said it was likely that by that stage Mr. Rosen would have told him that he had had discussions with Deutsche Bank. It also appears that, by this time, Mr. Moriarty had been informed of the decision. As we have already indicated that the market reality was that the shares would almost certainly be available, it would not be unusual for a draft press release to be prepared in anticipation of the completion of the share purchases.

    MR. ROSEN'S TELEPHONE CONVERSATION WITH MR. MADAN ON 8 JULY 2002

  118. The next (and probably the most important) factor taken into account by the Judge was a telephone conversation of 8 July 2002, 11.13 am New York time (NZ time 9 July, 3.13am) between Mr. Rosen (Perry Corporation’s head trader) and Mr. Madan (from Deutsche Bank). Given the importance of this telephone conversation we set it out in full in Appendix Four. As can be seen from the transcript, Mr. Rosen said that he wanted to make sure that:

    we have those shares as of the record date, that we are the beneficial holders of interest as of the record date, so that we have the freedom and flexibility .... to deal with those shares as we would like – as we want to.

  119. He put Mr. Madan on notice that he would probably be coming back in the near future to "take the shares back" (as Mr. Madan put it) or, as Mr. Rosen said, "unwind the swap". Mr. Rosen then asked Mr. Madan to give him a name of someone in Deutsche Bank for his lawyers to consult to ensure that their interpretation of the applicable laws and regulations was the same. Mr. Madan said that he would get the name of the appropriate person and let Mr. Rosen know the following day.

  120. The Judge observed that Mr. Rosen, in giving evidence, was scrupulous about the words he used to describe the reacquisition of the shares. Mr. Rosen insisted that Perry Corporation had purchased the shares from Deutsche Bank and disassociated himself from descriptions such as "taking the shares back". She said, however, at para [118] that it was interesting that Mr. Rosen:

    so precise in the language he used in giving evidence and so insistent on counsel using only the buy/sell terminology in addressing questions to him, nevertheless was happy with his own description of "unwind the swap" in response to Mr. Madan’s characterisation "take the shares back". If, as Mr. Rosen suggested in evidence, Mr. Madan was mis-characterising the situation when he used those words, then equally Mr. Rosen was reinforcing the mis-characterisation when he responded that the swap should be unwound. Implicit in the word "unwind" is an unravelling or reversal of the initial transaction.

  121. Mr. Rosen gave evidence that both he and Mr. Madan were operating under the assumption that the shares would be there. The Judge said at (para [204]) that it was clear from Mr. Madan’s responses to Mr. Rosen that he was hearing for the first time of Perry Corporation’s wish to reacquire the shares, and why. In her view, however, the language used in the conversation was that of a potential purchaser who knows shares are available to buy and the corresponding vendor who knows he has the shares to sell. She had earlier (at para [119]) expressed the view that it was surprising that the most basic inquiries were not made, such as whether Deutsche Bank was holding the shares, whether they would be available for sale and the price and other terms that might relate to such a sale. This was despite the fact that Mr. Rosen would have been aware that Deutsche Bank was free to deal with the shares as it wished. She had gone on to say:

    That being the case it is difficult to see how there could be any "assumption" or "expectation" that the swaps could be unwound and the shares made available, subject only to meeting local compliance requirements in relation to the transaction, without at least some basic checks to establish that the shares were available for purchase by Perry Corporation and that Deutsche Bank was a willing seller.

  122. At para [204] Potter J expressed the view that it was surprising, given the importance and urgency of the situation, that Mr. Rosen and Mr. Madan were prepared to proceed on the basis of independent inarticulated assumptions. She said:

    Given the urgency and importance of completing the swaps unwind and shares repurchase which Mr. Rosen clearly made known to Mr. Madan, I find it surprising that both were confident to proceed on the basis of their independent unarticulated "assumptions" without confirmation of any kind if, as the defendants contend, they were based purely on commercial reality as each independently assessed it.

  123. She concluded by saying that she considered that the inference is properly available that this was because the parties had a mutual understanding that the shares would remain available for repurchase. She said:

    I consider the inference is properly available that their confidence rested on a mutual understanding that the shares sold to Deutsche Bank by Perry Corporation and held by Deutsche Bank as a hedge for the Perry Corporation equity swaps, would remain available for repurchase by Perry Corporation.

  124. In concluding that an arrangement or understanding existed, Potter J said that the telephone conversation provided important direct evidence of the nature of the transactions between Perry Corporation and Deutsche Bank. She said at para [222]:

    I have found that the language used by both parties to that telephone conversation accurately describes the transaction they were discussing, i.e. an integrated transaction of unwinding of equity swaps and repurchasing of the shares transferred at the time the equity swaps were established. I have rejected Mr. Rosen’s evidence that the words used did not carry their obvious meaning, and mis-characterised the transaction under discussion. That evidence directly supports a finding of the existence of an arrangement or understanding between Perry Corporation and Deutsche Bank, and together with all the other evidence satisfies me that it was more likely than not.

  125. We note first the Judge’s comment as to the use of terminology by Mr. Rosen. This was a case where all parties focussed on the use of terminology to an unusual degree. In our view this was less than helpful. People in ordinary business situations cannot be expected to speak with the precision that one would do if seeking to elucidate legal relationships. Mr. Rosen’s insistence while giving evidence on the correct legal terminology when clearly he had not been so scrupulous in the past may have made him appear less than candid. More charitably, it could be seen just as a desire not to be inadvertently "caught out" at trial in concessions through the loose use of language.

  126. We next comment on the Judge’s view (expressed at para [119] and quoted above) that it would not have been reasonable for the parties to be operating on the assumption that the shares would be available for purchase. We differ from the Judge in this regard. Given the nature of the Rubicon shares and in particular their illiquid nature, we have held that it was highly likely that the shares would be available for sale to Perry Corporation and that Perry Corporation would have been aware of this. We thus consider that the Judge was overstating the position.

  127. Nevertheless, we accept that on one view it might be thought surprising that Mr. Rosen did not remove the remaining uncertainty by asking for confirmation that the shares were available. On the same view it might be thought that Mr. Madan would have indicated that he needed to confirm availability, especially as, according to Mr. Cohen’s evidence, he did not have the authority to agree to the transaction and had no means of checking if the shares were still held. In addition, as the Judge pointed out, there was no evidence from Mr. Madan on what can be seen as a vital telephone conversation.

  128. One reason that the failure to inquire might be thought particularly surprising was the urgency involved and the lack of realistic other options. Mr. Rosen said in evidence (although not referring specifically to the conversation with Mr. Madan) that he did not make inquiries of Deutsche Bank as to whether it did actually continue to hold the shares. Nor did he refer to the Rubicon share register or records of the substantial security holder notices in this regard. He said that, if the swaps counter-party had not held the underlying shares, he would have instructed it or another broker to acquire them in the market. The Judge was sceptical of the claim that Perry Corporation could have acquired that number of shares in the market just after the GPG bookbuild process and particularly without paying a substantial premium – see paras [127]-[129]. She concluded that purchasing in that manner in time for the 19 July meeting was not an option realistically available. We agree.

  129. Mr. Berg gave evidence that Perry Corporation had considered purchasing Rubicon shares before GPG had even entered the picture in order to counter the opposition of Xylem (a Fletcher Forests shareholder) to the Fletcher Challenge Forests transaction which became apparent in late May or June 2002. His evidence was that this was when he first discussed with Mr. Moriarty the possibility of Perry Corporation issuing a press statement in support of the Fletcher Forests’ proposal and that additionally Perry Corporation had discussed internally whether it should attempt to acquire a share position equal to its full economic interest in order to reduce any uncertainty raised by Xylem’s opposition. If this was the case, it might be thought surprising that there was no check on the availability of the shares at that time.

  130. On another view, however, if the uncertainty was near to non-existent, such that the ability to repurchase the shares was inevitable in a practical commercial sense, then Mr. Berg’s, Mr. Rosen’s and Mr. Madan’s confidence that the shares would be available and the consequent failure to make inquiries is entirely explicable. This is especially the case as the purpose of the telephone call was to warn of possible purchase rather than to place a definite order. When it was put to Mr. Rosen in cross-examination that at no stage in the conversation with Mr. Madan did he ask him about the bank’s willingness or ability to sell the shares, Mr. Rosen said that what he would normally do is tell the salesperson what he wanted to do and assume that the salesperson would come back to him if there were any issues arising. Mr. Cohen’s evidence was that Mr. Madan had to check, and did check, with him whether the shares were available. There is some force in Mr. Asher’s submission that Mr. Cohen was seen by Mr. Rosen and Mr. Madan as simply the person who could assist in ensuring compliance with the appropriate regulations. This is understandable, however, in the context of the commercial reality that the shares were highly likely to be available.

  131. Another point of significance for the Judge in relation to this telephone call was the fact that Mr. Madan was also involved in the setting up of the swaps and the purchase of the underlying shares as a hedge in 2001. Potter J saw it as a significant factor that the shares had been sold to the banks at the time of entry into the swaps and that they were repurchased on termination of the swaps. The Judge found (at para [124]) that the focus, both at entry and termination, was on the "transfer of the shares, with the equity swaps as a corollary". Mr. Asher also stressed this aspect in submissions. He submitted that the Rubicon swaps were not as Mr. Rosen said, "plain vanilla total return swaps". Instead the primary driver was to get the shares out of Perry Corporation’s hands, and the language used at the time of entry into the swaps tied into the transcript of the call of 8 July (New York time), Mr. Madan stating in an email of 30 May 2001, "We are okay to take 14 mil RBC NZ shares in swap".

  132. We would accept that when shares are sold on entry into equity swaps and repurchased on termination it could make it slightly more likely that there is an arrangement. This applies only if there was a reason for entering into that arrangement. As indicated above, we can see no strong reason for Perry Corporation to have entered into such an arrangement, particularly where the market reality was that there was little doubt as to the ability to repurchase the shares if needed. In addition, the evidence was that it was rare for Perry Corporation to sell shares to counter-parties upon entry into swaps – it had done so in only 24 of the last 392 equity swap trades in the six months to 28 November 2002. Shares were acquired from counter-parties at termination in 41 cases but there was no evidence of any correlation with the 24 sold in. We are unable therefore to see this factor as significant.

    SHARE ACQUISITIONS: THE SHARES WERE AVAILABLE

  133. The Judge next relied on the fact that, when Perry Corporation wanted the Rubicon shares, the shares were available for it to acquire. She pointed out that, on both occasions when Perry Corporation needed large parcels of shares urgently – for the Rubicon buy-back, and when it wanted to be able to exercise voting rights at the Rubicon AGM of 19 July 2002 – equity swaps were terminated on less notice than the contracts provided for and shares were repurchased.

  134. In our view this is not necessarily indicative of an arrangement or understanding. It could equally be a function of the market reality discussed above.

    PERRY CORPORATION AS SHAREHOLDER/OWNER

  135. Potter J also relied on other descriptions of Perry Corporation as shareholder or owner of the shares. She said that there was no dispute that, at the 8 July 2002 (NZ time) meeting between Mr. Gibbs of GPG and Rubicon following GPG’s acquisition of Rubicon shares, Perry Corporation was described by Mr. Moriarty as a shareholder with an interest about the same size as GPG’s. Potter J thought it revealing that Mr. Moriarty described Perry Corporation in these terms when he had yet to be told of Perry Corporation’s decision to acquire the shares. This was, Potter J said, surely a situation in which Perry Corporation’s position needed to be accurately conveyed but that Perry Corporation was described as a shareholder with a significant interest, precisely the description Rubicon had given internally to Perry Corporation over the last year. In her view this was not an occasion on which to use "loose" or "unfortunate" descriptions as the purpose of the meeting was to find out if Mr. Gibbs knew about Perry Corporation and was at Perry Corporation’s behest.

  136. Mr. Galbraith submitted on this point that the description given to Perry Corporation at the 8 July meeting was not evidence from which an inference could be drawn that Perry Corporation had a disclosable relevant interest in Rubicon. How Mr. Moriarty chose to represent Perry Corporation’s interest cannot, he submitted, give rise to an inference against Perry Corporation. Mr. Moriarty’s description was in any event accurate. Perry Corporation was a shareholder in Rubicon holding around 3.08% and, in addition, holding a significant economic interest by way of equity swaps. Perry Corporation was not described as having a shareholding similar to GPG, nor as a shareholder of similar size to GPG.

  137. Mr. Farmer, for Rubicon, also submitted that the Rubicon attendees had said in evidence that the fact that the interest was by way of swaps had been disclosed at the meeting. If the swaps had been mentioned, Mr. Farmer submitted that there could be no question of a misleading description. In addition, he submitted that the purpose of the meeting was to discuss GPG’s aspirations in regard to Rubicon and that it had been arranged before Mr. Moriarty was asked by Perry Corporation to disclose Perry Corporation’s involvement to GPG. In all of these circumstances both Mr. Galbraith and Mr. Farmer submitted that no inference should have been drawn on the basis of what was said at the meeting.

  138. We accept these submissions. We observe that Mr. Gibbs of GPG had no recollection of whether it had been disclosed that Perry Corporation’s interest was in the form of swaps and so the parties had agreed to differ on the point. The Judge was aware of this (see para [93] of her judgment). In our view she should not have drawn an inference from the use of language at that meeting when what she relied on may not have been a complete record of the conversation.

  139. The Judge also pointed to the fact that on 25 July Mr. Perry spoke with Mr. Gibbs of GPG. Mr. Perry said that Perry Corporation had decided to "make sure those shares were resold to us so that we could vote them" and that Perry Corporation had been working with the management of Rubicon for a year and a half and had been trying to sell Fletcher Forests around the world. Potter J found that Mr. Perry’s description was of a situation where, despite having transferred the shares and acquired the equity swaps, Perry Corporation continued to be in a position where it could make sure the shares were resold to it when it wanted them.

  140. At the time of this conversation Perry Corporation had already acquired the shares. It is difficult to see therefore why this conversation shows that there had been a pre-existing arrangement in May/June 2001 to enable Perry Corporation to acquire the shares. Indeed, it might also be said that, if Perry Corporation had been party to an arrangement or understanding whereby the shares remained available for repurchase, then Mr. Perry would not have needed to make sure the shares were resold to Perry Corporation because he would already have been sure that this could happen at any time Perry Corporation wished.

    VOTING THE SHARES

  141. The next factor relied on by Potter J was the fact that Perry Corporation wanted to be able to vote its shares at the annual general meeting because it was concerned about GPG’s intentions, which it considered were unclear but could be contrary to its interests. She found that Rubicon had the same concerns, despite Mr. Moriarty’s attempt at trial to distance himself. She said that Mr. Moriarty’s alleged indifference did not sit easily with the fact that he had sent an email to Mr. Berg on 14 July to say "I definitely need your shares". Potter J concluded that, while claiming only an economic interest in Rubicon over the previous 13 months, when GPG caused the heat to go on, Perry Corporation urgently moved to reacquire the shares and disclosed its power as a 15.98% shareholder. Mr. Asher supported this conclusion and submitted that it would have been commercially unrealistic for Perry Corporation to have left itself and Rubicon exposed to the risk that their mutual objectives could be thwarted by Perry Corporation’s inability to vote if a critical situation were to arise.

  142. Mr. Galbraith submitted that Perry Corporation’s reasons for wanting to vote an equivalent shareholding to its economic interest over a year after entry into the equity swaps cannot be used to draw an inference that there had been an arrangement at the time of entry into the swaps.

  143. We accept Mr. Galbraith’s submission. There was no suggestion that the advent of GPG could have been anticipated in May/June 2001 when the swaps were entered into. And it was Mr. Berg’s evidence that Perry Corporation had never before found it necessary to return to a physical shareholding in order to vote at a meeting.

    ABSENCE OF CERTAIN WITNESSES

  144. The final matter relied on by the Judge was an adverse inference drawn from the absence of Mr. Perry of Perry Corporation, Mr. Madan of Deutsche Bank, and Mr. Dozier and Mr. Lloyd of UBS Warburg. Potter J considered that the missing witnesses would have been able to give evidence that was likely not only to have been relevant, but possibly crucial. In particular she saw Mr. Perry, the sole shareholder and president of Perry Corporation, as a key witness who had, she said, been the subject of an order requiring him to give evidence in person. Adopting the rule in Jones v Dunkel (1959) 101 CLR 298, Potter J considered (at para [217]) that it was open to her to infer that the missing witnesses:

    would not have assisted the defendants’ case, and may have exposed facts unfavourable to it. That has served to confirm the inferences I have drawn, adverse to the defendants, from the evidence that was presented to the Court.

  145. Mr. Galbraith, for Perry Corporation, submitted that there was no justification for drawing adverse inferences from the absence from the witness box of Mr. Dozier and Mr. Lloyd who, as salespeople, had no more power to bind UBS Warburg than Mr. Madan had to bind Deutsche Bank. In addition, Mr. Galbraith submitted that, as they were not witnesses compellable by Perry Corporation, it is inappropriate to draw adverse inferences when Perry Corporation was not practically able to produce such evidence. With regard to Mr. Perry, Mr. Galbraith submitted that Potter J misstated the potential relevance of his evidence and the effect of the order that he give evidence in person. Mr. Perry had not been ordered to give evidence. He was merely told that, if he was to be called, he would have to attend in person and not by video link. In Mr. Galbraith’s submission, there was no justification for drawing an adverse inference from Mr. Perry’s absence when witnesses from Perry Corporation were called who, unlike Mr. Perry, had been directly involved in the actual transactions at issue.

  146. Mr. Galbraith further submitted that Potter J misapplied the rule in Jones v Dunkel which permits a Court only to draw an inference that the uncalled evidence would not have assisted that party’s case but cannot, as the Judge attempted to do here, be used to prove the plaintiff’s case.

  147. Mr. Asher, for GPG, accepted that Mr. Madan, Mr. Dozier and Mr. Lloyd were non-compellable but submitted that no explanation had been given for the absence of these witnesses who were the only officers of the swaps counter-parties able to give first-hand evidence as to what actually happened, as against evidence of what possibly should have happened. Similarly Mr. Perry was an important witness. As the sole shareholder and president of Perry Corporation he had personal oversight of its strategies, signed substantial security holder notices, participated in telephone discussions with Rubicon and called Mr. Gibbs on 25 July 2002. Mr. Asher submitted that Potter J would have well understood that Mr. Perry had not been ordered to attend, as otherwise he would have been in contempt, but that the order had been predicated on the assumption at the time that Mr. Perry would give evidence.

  148. Finally, Mr. Asher submitted that Potter J did not misapply the rule in Jones v Dunkel by holding that it enabled her to infer not only that the absent witnesses would not have assisted Perry Corporation’s case but may also have exposed facts unfavourable to it. In Mr. Asher’s submission this broader approach to the rule was available to the Judge. Even if this is wrong, Mr. Asher submitted that Potter J’s findings would not have been any different as the inference drawn from the absence of these witnesses served only to confirm inferences already drawn from the evidence that was presented to the Court.

  149. The precise terms of the inference that may validly be drawn from the non-calling of a witness are open to some dispute – see e.g. Dilosa v Latec Finance (1966) 84 WN Pt 1 NSW 557, 581-582, Claiborne Industries Ltd v National Bank of Canada (1989) 59 DLR (4th) 533, 546 (CA Ont), Brandi v Mingot (1976) 12 ALR 551 (HCA).

  150. In New Zealand, Thomas J said in Dairy Containers v NZI Bank Ltd (1994) 7 PRNZ 465, 468 (HC) that a court can, in appropriate circumstances, draw an inference in a civil case, "where there is an unexplained failure by a party to give evidence or call a witness or tender documents, that the uncalled evidence would not have assisted that party’s case". Eichelbaum J went further in Innes v Ewing [1989] 1 NZLR 598, 607 (HC) where he said that the natural inference from the failure to call a pertinent witness is that he or she would have exposed facts unfavourable to the party having the choice. In this Court, in Pepi Holdings Ltd v BMW NZ Ltd & Tannadyce Investments Ltd CA22/97 25 August 1997, Elias J, for the Court, said:

    It may often be the case that, where a witness is not called, a Judge will be entitled to infer that the witness could not add to the case of the party who could otherwise be expected to call him or her. It is not necessary for present purposes because the inference was unnecessary for the decision, to decide whether this was one of the rare cases in which it is proper to draw an inference adverse to the party who could be expected to call a witness, from failure to do so.

  151. In Jones v Dunkel (1959) 101 CLR 298, Windeyer J (at 321) approved of the following passage from Wigmore on Evidence (3ed), 1949 at 142, which he said was "plain commonsense", as follows:

    The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which made some other hypothesis a more natural one than the party’s fear of exposure. But the propriety of such an inference in general is not doubted.

  152. The formulation in Wigmore appears to equate to the so-called broad view of Jones v Dunkel which Mr. Asher contends should be adopted. Windeyer J, however, went on to state the position in narrower terms at 322 where he said:

    Unless a party’s failure to give evidence be explained, it may lead rationally to an inference that his evidence would not help his case.

  153. In our view, it is not helpful to analyse the position in terms of broad and narrow views. Neither is it helpful to refer to the "rule" in Jones v Dunkel. There is no rule. Rather, there is a principle of the law of evidence authorising (but not mandating) a particular form of reasoning. The absence of evidence, including the failure of a party to call a witness, in some circumstances may allow an inference that the missing evidence would not have helped a party’s case. In the case of a missing witness such an inference may arise only when:

    1. the party would be expected to call the witness (and this can be so only when it is within the power of that party to produce the witness);

    2. the evidence of that witness would explain or elucidate a particular matter that is required to be explained or elucidated (including where a defendant has a tactical burden to produce evidence to counter that adduced by the other party); and

    3. the absence of the witness is unexplained.

  154. Where an explanation or elucidation is required to be given, an inference that the evidence would not have helped a party’s case is inevitably an inference that the evidence would have harmed it. The result of such an inference, however, is not to prove the opposite party’s case but to strengthen the weight of evidence of the opposite party or reduce the weight of evidence of the party who failed to call the witness.

  155. A helpful formulation of the principle is contained in the following extract from the judgment of Glass JA in Payne v Parker [1976] 1 NSWLR 191, 200-202 (NSW SC):

    (1)

    The rule is a principle of the law of evidence whereby a particular form of reasoning is authorized.

    (2)

    The reasoning which is permissible involves the treatment of a failure to adduce evidence as a reason for increasing the weight of the proofs of the opposite party or reducing the weight of the proofs of the party in default: O’Donnell v Reichard [[1975] VR 916, 921]. The principle may be invoked for a deficiency in the evidence either of a party bearing the legal onus of proving an issue, or of a party bearing the evidentiary burden only: Ibid [[1975] VR 916, 921]; Steele v Mirror Newspapers Ltd [[1974] 2 NSWLR 348, 360, 367]. If the failure is of the latter kind, the direct evidence of the party with the onus of proof can be more readily accepted, and inferences in his favour may be more confidently drawn: Jones v Dunkel [(1959) 101 CLR 298, 308, 312]. If the failure is of the former kind, a consonant formulation would be that the direct evidence of the party carrying the onus may be more readily rejected, and the inferences for which he contends may be treated with greater reserve. The default "brings a great slur on his cause": Ward v Apprice [(1704) 6 Mod Rep 264; 87 ER 1011].

    (3)

    The failure to call a particular witness is merely one instance of evidentiary deficiency which brings the principle into operation. Other instances are the failure to adduce any evidence at all: the Tozer Kemsley case [(1956) 94 CLR 384, 403]; the failure to produce a particular document, and the failure to prove a particular fact ....

    (6)

    Whether the principle can or should be applied depends upon whether the conditions for its operation exist. These conditions are three in number:

    (a)

    the missing witness would be expected to be called by one party rather than the other,

    (b)

    his evidence would elucidate a particular matter,

    (c)

    his absence is unexplained.

  156. In this case, Mr. Galbraith’s assertion that Potter J attempted to apply the rule in Jones v Dunkel to prove GPG’s case is unfounded. Potter J made it clear that the absence of the witnesses served only to confirm the inferences, adverse to Perry Corporation, that she had already drawn from the evidence that was presented. In terms of the principle discussed above this was legitimate.

  157. Moving now to discuss the particular inferences she drew, we first examine the position of Mr. Perry. With respect to Potter J, we consider that she overstated the importance of Mr. Perry as a witness. In our view, it is difficult to see what more Mr. Perry could have added to the evidence given by the other Perry Corporation personnel. Perry Corporation’s Managing Director, Chief Financial Officer at the relevant time and Head Trader (Mr. Berg, Mr. Vernon and Mr. Rosen) were all principally and directly involved in the equity swap transactions at issue and all gave evidence. Mr. Vernon described in his evidence the involvement of all four Perry Corporation personnel. He said his job was oversight of all agreements with brokers. Mr. Rosen, as head trader, was responsible for executing all trades or supervising execution. Mr. Berg was the research analyst responsible for all aspects of the Rubicon investment and was responsible for the conduct of the trade. Mr. Vernon said that Mr. Perry would supervise all of them and provide assistance in areas where they needed his guidance or action. He said, however, that Mr. Perry was not involved in the decision making relating to the transactions at issue. Nor to his knowledge did Mr. Perry have any independent role in relation to these transactions.

  158. Although Mr. Perry oversaw Perry Corporation’s investment strategies, he did not appear to have been involved in the details in a manner separate from the other Perry Corporation witnesses. There was no occasion in which Mr. Perry was the main participant in a particular event or conversation, with the exception of the 25 July telephone conversation between Mr. Perry and Mr. Gibbs (and even this conversation had, unknown to Mr. Gibbs, been overheard by Mr. Berg, Mr. Rosen and another trader). In any event, we have indicated that we do not see this conversation as significant. In addition, if Mr. Perry had given evidence in person, this would have meant that four key Perry Corporation personnel (out of an organisation that is apparently not large) would have been out of the office and out of the country at the same time. An inference cannot be drawn from the failure of a party to give call multiple witnesses to give cumulative evidence - see Wigmore at s286 and the discussion in Cubillo v Commonwealth of Australia (2000) 174 ALR 97, 220 (FCA). We therefore do not consider that the Judge was justified in drawing an adverse inference from the absence of Mr. Perry.

  159. Potter J also referred to the absence of Mr. Madan (of Deutsche Bank), Mr. Dozier (Mr. Madan’s equivalent at UBS Warburg) and Mr. Lloyd who was described by Mr. Gray as UBS Warburg’s primary Perry Corporation contact in Australia. Only in the case of Mr. Lloyd, who was said to be no longer with UBS Warburg and now based in London, was an explanation given. It is true that none of these witnesses was compellable and that each would have been required to travel a long distance in order to attend the hearing. In addition, none of the three were employees of Perry Corporation and Mr. Lloyd was no longer even employed by Perry Corporation’s swaps counter-party. With the possible exception of Mr. Lloyd, we do not, however, accept that it was not within Perry Corporation’s power to produce these witnesses. Two senior bank employees (admittedly from Australia) did give evidence and there was no suggestion that there had been a refusal by the banks to supply other witnesses.

  160. We consider that it was open to the Judge to have concluded, as she did, that the Madan/Rosen telephone call of 8 July 2002 required an explanation from both participants. Mr. Madan was the only person who could have given an explanation of the language used by him in that conversation and she was entitled to conclude that his evidence would not have helped the Perry Corporation case.

  161. The lack of any witness from UBS Warburg who had had any involvement at all in the swaps (unlike for Deutsche Bank where Mr. Cohen, who was in charge of the hedge, had been called) could also have been legitimately used by the Judge to infer that there was no satisfactory explanation that could be tendered by UBS Warburg that would counter the factors she saw as pointing to the existence of an arrangement. We do note, however, that the relevant witnesses from UBS Warburg were based in Connecticut.

    NEUTRAL FACTORS

  162. Potter J additionally set out factors that she regarded as neutral in reaching her conclusion that there were reasonable grounds to suspect non-disclosure of a relevant interest. The only one of note (in that it is the only one contested by Perry Corporation) is the evidence of Mr. Cohen and Mr. Gray. The Judge said that Mr. Gray and Mr. Cohen could give evidence of the division of functions within the banks but that they were not involved with the equity swaps transactions "except Mr. Cohen peripherally with hedging and compliance details" (para [239]).

  163. We agree with the Judge that Mr. Gray’s evidence is directed only to the general policies of the bank. Mr. Gray is head of prime broking and is involved in the process side of the swaps business in Australia and New Zealand. It is true that he had no direct involvement with the Perry Corporation swaps. The client contact had been managed largely through staff in Stamford, Connecticut, with the pricing and hedging arrangements managed in Australia by Mr. Lloyd who reported to Mr. Gray but who had since left the firm and moved to London. Mr. Lloyd was a member of the sales staff who, Mr. Gray said, act as intermediary between clients and the trading book and request information on pricing and sales products from the traders. The traders do not have direct client contact and are responsible for pricing and hedging of the underlying shares. Mr. Gray said that Mr. Lloyd’s role would have been to ensure the effective coverage of the client in the Australasian time zone and to provide a point of contact for the bank’s offshore salespeople and the client if necessary. He said, however, that the Australian office did not deal directly with Perry Corporation but received instructions from, and dealt through, the Stamford office.

  164. Mr. Cohen’s evidence points to a far more direct role in the relevant transactions. As a Director in the equities division at Deutsche Bank in Sydney Mr. Cohen’s main role is providing structured products to clients, with part of his responsibility including the hedging and managing of the risk on equity swaps where the underlying security is an Australian or New Zealand share. With regard to the first set of equity swap transactions entered into between Perry Corporation and Deutsche Bank, Mr. Cohen said that he had been telephoned on or about 31 May 2001 by Mr. Julian Sale and Mr. Madan from New York, who had asked whether the Bank would enter into equity swaps in respect of Rubicon shares and take a large holding in Rubicon as a hedge for the swaps. Mr. Cohen checked the bank’s internal limits and confirmed its ability to do the swaps. Mr. Cohen’s evidence was that it was his decision to hedge the swaps by purchasing Rubicon shares from Perry Corporation. He said that the Rubicon shares were the natural hedge for the swaps and a purchase from Perry Corporation was the quickest, easiest and cheapest way to acquire the shares he wanted to use to hedge the swaps. The alternative would have been to go on market to buy the hedge but Mr. Cohen said that this would have taken some time and would have involved the management of the resultant risk and market impact.

  165. Mr. Cohen’s insistence that it was his decision to buy the hedge from Perry Corporation and the suggestion that there was a choice in this regard has an air of unreality. Perry Corporation would presumably not have entered into the swaps had Deutsche Bank not purchased the shares but would have sought another counter-party who would make the purchase.

  166. Mr. Cohen put the trade through the market and booked both the cash trade and establishment of the swaps in his "blotter", while the resultant cash trade confirmation and swaps confirmations were issued by Equity Operations staff (whom he described as being in a separate division responsible for confirming trades with client counter-parties and internally for managing and reconciling the Deutsche Bank positions). Mr. Cohen said he would have told Mr. Madan of the trade and probably also either telephoned or emailed Perry Corporation.

  167. It was part of Mr. Cohen’s general responsibility to manage the hedging of the swaps. He said Deutsche Bank was always seeking to maximise the revenue it can derive from any transaction or position, so once they had shares as a hedge they might lend them out, use them as collateral or seek to put in place offsetting equity swaps and sell the hedge. Mr. Cohen said that these types of transactions would be referred to him for approval, except in cases of securities lending when the shares could be recalled without notice.

  168. Although there was an air of unreality about Mr. Cohen’s insistence that in practice he had a choice about the initial purchase of the hedge, the same does not apply to this evidence concerning the management of the hedge during the term of the swaps. While there may have been market restraints in this case, in terms of the opportunity to change the nature of the hedge or otherwise deal with the shares, we accept that the power to deal with shares held as a hedge, if the opportunity arose during the terms of the swaps, resided with Mr. Cohen.

  169. The second set of swap transactions of 6 June 2001 also involved a telephone call from Mr. Madan to Mr. Cohen. Mr. Cohen again checked whether there were any regulatory limits. The acquisition of further Rubicon holdings was cleared and Mr. Cohen told Mr. Madan the level to which he had approval, after which he agreed to do the swaps and buy 10 million Rubicon shares to hedge the swaps.

  170. Mr. Cohen was involved too with the partial unwind of the swaps when Perry Corporation sold into the Rubicon buy-back after being contacted by Allan Goco, a Deutsche Bank equity derivatives salesperson in Hong Kong who had in turn been in contact with Perry Corporation on another matter.

  171. With respect to the final unwind of the swaps Mr. Cohen said Mr. Madan contacted him indicating that Perry Corporation wished to unwind the swaps and buy 19 million shares. The reason Mr. Madan needed to check with him was, said Mr. Cohen, because Mr. Madan would not have access to information about the Deutsche Bank holdings in Rubicon as they were booked on the Australian system. Mr. Madan had no access to that system and, in addition, had no authority to make the decision to sell to Perry Corporation. Mr. Cohen checked whether Deutsche Bank had that number of shares to sell and spoke with the legal and compliance divisions of the bank about the unwind in order to ensure that the trade was done in an orderly manner. Mr. Cohen also at this time spoke with Perry Corporation’s New York lawyers and, on the day of the trade, emailed a trade report to Mr. Rosen and Mr. Kravitz of Perry Corporation and to Mr. Madan.

  172. Given the functions performed by Mr. Cohen in relation to the hedge it is difficult to see him as only peripherally involved with the transactions. He might have been distant in the sense that he was not the one talking directly to the client but, given the division of functions, he was in charge of the hedge and after all it is the hedge with which we are concerned. It is thus difficult to see how his evidence could be described as neutral. We regard his evidence as being of central importance.

  173. Even the evidence of Mr. Gray and Mr. Cohen as to the division of functions and existence of management controls in the banks cannot be properly described as neutral. Both Mr. Gray and Mr. Cohen were definite in their evidence that it was the responsibility of the trading function in the banks to price the swaps and manage hedging. Mr. Gray said that traders in UBS Warburg have no client contact at all. The sales staff act as intermediary between clients and the trading book. In Deutsche Bank the primary contact with clients is through the sales staff but Mr. Cohen as a trader did appear to have some client contact. Mr. Cohen and Mr. Gray both said in evidence, however, that the sales staff would have no knowledge of hedging arrangements and no ability to control the type of hedge undertaken or the use of any hedge shares during the currency of the swaps. Mr. Gray said that this strict internal division meant that the sales staff were unable to enter into any arrangements with a client with regard to shares held as a hedge.

  174. Mr. Gray also said that it was not appropriate for the details of the security holdings of other parts of UBS Warburg or its aggregated holdings to be known internally by those involved in trading and sales because fund managers and proprietary traders may be taking positions in certain stocks. Therefore these matters are the sole responsibility of legal and compliance staff who are not involved in day to day trading activity and who are also responsible for regulatory compliance issues arising on swaps or hedge transactions including the substantial security holder notices.

  175. Mr. Gray considered that any agreement or other arrangement that gave Perry Corporation the right to acquire, dispose of or vote any Rubicon shares held by UBS Warburg as part of its hedge of an equity swap would have been totally inconsistent with the documentation pertaining to the Perry Corporation transactions, which he said were standard total return equity swaps conducted in all respects under the standard ISDA agreements and in accordance with UBS Warburg’s usual practices for total return equity swaps. Such an arrangement would not be possible because only the trading division can price the equity swap or arrange for the establishment or any dealing with shares held on hedge and salespeople have no control over these processes. Mr. Cohen conceded that an equity swaps arrangement could be used to warehouse shares but said that to do so would require a special arrangement outside the scope of standard equity swaps dealing procedures and documentation. He stated, however, that Deutsche Bank would not warehouse shares under any circumstances. Equity swaps are, he said, cash settled, with the fixed or floating amount payer having no right to receive the underlying shares and the equity amount payer no obligation to deliver such shares. Both Mr. Gray and Mr. Cohen said in evidence that it was the policy of their respective banks not to permit discussion of hedging transactions with swaps counter-parties and it was Mr. Cohen’s evidence that this was an area in which relevant staff were counselled by the bank’s legal division.

  176. From Mr. Cohen’s and Mr. Gray’s evidence it is clear that the division of functions and management controls are taken seriously by the banks. It is therefore reasonable to assume that they provide some constraint on the actions of employees. At its most basic, employees flouting such controls would face disciplinary action. If entering into an arrangement is proscribed, a person must have a reason to enter into it that seems important enough to risk disciplinary action being taken against them if it is discovered. It is difficult in this case to see what that reason might be (apart possibly from a general desire to please a client).

  177. In the case of Deutsche Bank, the Judge relied on the transcript of Mr. Rosen’s telephone conversation with Mr. Madan of 8 July to infer the existence of an arrangement. Mr. Madan had also been involved at the time the swaps were set up. Although the Judge was unable to determine precisely who had been involved in reaching the arrangement, Mr. Madan was clearly a possibility, and she held (at para [219]) that he knew of the arrangement. It is, however, clear from the evidence of Mr. Cohen, not only that the entry into such an arrangement would be against bank policy, but that a salesperson such as Mr. Madan would have no ability to implement such an arrangement, given the division of functions within the bank.

  178. Mr. Galbraith’s submission was that this rules out any arrangement with a salesperson creating a relevant interest because such an arrangement could never create a power to acquire the shares. We do not accept that submission as any power does not need to be legally enforceable and can be subject to conditions – see s5(4). Theoretically an arrangement in terms of s5(1)(f) may be able to exist with a salesperson, especially where the market reality is that the shares would almost certainly be available if needed. In such a case the salesperson could merely be confirming that market reality. One can imagine a position where an overzealous salesperson faced with a customer, who is uncertain as to whether or not to enter into a swap, could articulate market reality and indicate to the reluctant client that market reality would mean that the shares would be available if needed. Depending on the phrasing this could provide the communication needed to bring into existence an arrangement or understanding.

  179. Here, however, we are not dealing with a customer ignorant of swaps and certainly not with one reluctant to enter into the particular swaps. It was after all Perry Corporation which approached the banks in this regard. There does not therefore appear to be an obvious incentive for entering into an arrangement that is contrary to bank policy. We note too that Mr. Madan must have been all too aware that he would have no control over the hedge shares and thus no absolute guarantee (apart from market reality) that he could deliver on the arrangement. This diminishes even further the likelihood that an arrangement would be entered into by him. Mr. Rosen made it clear in cross examination that he knew Mr. Madan, as a salesperson, did not have the responsibility or authority to make decisions regarding the hedge to an equity swap or whether there was in fact a hedge in the first place. In our view this makes it unlikely that Mr. Rosen would enter into an arrangement with Mr. Madan knowing that it could be ineffective. Indeed such an arrangement would not be a significant advance on the position without such an arrangement. The market reality was that the shares were highly likely to be available for purchase.

  180. It is unlikely too that an employee in Mr. Madan’s position, if he did enter into an arrangement, would publicise its existence too widely in the organisation. In this regard, although Mr. Rosen said in cross-examination that the unwind at the time of the buy-back was arranged by Mr. Madan (and this remained uncorrected in reexamination), this does not appear to have been the case. Mr. Cohen’s evidence was that the partial unwind at the time of the buy-back was arranged by a Mr. Goco, who was an equity derivatives salesperson at the time based in Hong Kong and who had been dealing with Perry Corporation on another matter. There is documentation showing Mr. Goco’s involvement. An email of 4 September 2001 from Mr. Goco to Mr. Rosen stated that the equity swaps had been partly unwound and asked for confirmation that the swaps and cash trade were to be settled in US dollars. There is also an email from Mr. Goco to Mr. Cohen the following day to inform Mr. Cohen that he had confirmed with Mr. Rosen that he wanted to settle the swaps and the cash trade in US dollars. It appears unlikely that an arrangement entered into by a member of the New York sales staff, and one which is against bank policy, would be so widely known that it would include Hong Kong sales staff such as Mr. Goco.

  181. If an arrangement was made at a higher level in the bank (by a person with authority over Mr. Cohen for example) then it would appear unlikely that it would be communicated to sales team personnel like Mr. Madan and Mr. Goco (who had no control over the hedge) and not to Mr. Cohen (who was responsible for the hedge). The Judge appears to have accepted that Mr. Cohen did not know of any arrangement, as she described his evidence as neutral. Given the division of functions in the bank, Mr. Cohen could have defeated an arrangement by authorising a transaction such as a securities lending transaction, which could have rendered the shares unavailable at a period when they were wanted back. He may even have changed the nature of the hedge in some manner, for example by entering into an offsetting swap. The counter to this may be that it was unlikely, given the illiquid nature of the Rubicon stock, that opportunities for such transactions would have arisen. However, if that is the case, it diminishes the need for entry into an arrangement.

    DISCUSSION AND CONCLUSION

  182. We have indicated that in our view the evidence of Mr. Cohen and Mr. Gray as to the division of function and management controls in the banks is far from being neutral. We also consider the evidence of Mr. Cohen as to his actual involvement with the Deutsche Bank hedge as very important evidence pointing to the nonexistence of an arrangement. In addition, we do not consider, for the reasons discussed above, that the factors Potter J identified (with one possible exception) support her conclusion that an arrangement existed. Therefore, despite the fact that the Judge’s assessment was at least in part based on an assessment of the Perry Corporation witnesses’ credibility, we consider it is necessary for us to consider the matter afresh.

  183. First we examine the Rosen/ Madan telephone call of 8 July 2002 (New York time). The Judge’s conclusion on this call was coloured by her finding that, because of Mr. Cohen’s evidence that Deutsche Bank was free to deal with the hedge shares as it wished, there could be no assumption or expectation that the shares would be available for repurchase. While it is undoubtedly true that Deutsche Bank was free to deal with the shares, we have concluded that it was almost certain that the shares would be held as a hedge for the duration of the swaps and highly likely that they would be available for purchase by Perry Corporation if required. This means that the explanation that the parties to the 8 July conversation were acting on a shared assumption or expectation cannot be disregarded in the manner the Judge did. Indeed it is at least as likely an explanation of the conversation as the explanation that there was a pre-existing understanding or arrangement, especially as the call could be seen as a warning of possible purchase rather than a definite order. The order was in fact placed two days later, on 10 July 2002, when Mr. Rosen told Mr. Madan in a further telephone conversation to "go ahead and unwind that swap .... so you’re selling 19m shares and I will be buying 19m shares".

  184. In a practical business sense, an assumption that the shares would be available for purchase was eminently reasonable. On the other hand, there is no doubt that there was urgency in the situation and a lack of available options such that it might be thought Mr. Rosen may have wished to remove all doubt and seek confirmation that the shares were available. Equally Mr. Madan had no control over the hedge. It might have been thought therefore that Mr. Madan, understanding the urgency involved, may have warned Mr. Rosen that he would need to check on the availability of the shares. Mr. Cohen, who did have control over the shares, nevertheless had to check on the availability of the shares when the unwind occurred. This may merely be a reflection of the optimistic nature of salespeople (at least when talking to a client) as against the more cautious trader, but Mr. Madan was not called to give evidence on what was clearly a vital call and so the Judge was not able to hear his explanation on this point.

  185. The content of the 8 July Rosen/Madan telephone call, particularly in the absence of an explanation from Mr. Madan, combined with the fact that the Judge had concerns about the credibility (both generally and on this point) of the Perry Corporation witnesses, left it open to the Judge to take the view that there were reasonable grounds to suspect an arrangement with Deutsche Bank. But, if she should have been satisfied, on the basis of all the evidence and on the balance of probabilities, that there was in fact no arrangement or understanding with Deutsche Bank, this would mean that it would not have been proved that there were reasonable grounds to suspect – see para [49] above.

  186. The first point to be noted in this regard is the inherent unlikelihood of Perry Corporation needing to enter into such an arrangement with Deutsche Bank. The more certainty there was that the shares would be available at termination for repurchase, if needed, the less necessary entry into an arrangement would be. We have found that the availability of the shares for repurchase by Perry Corporation was highly likely in the case of Deutsche Bank. This market reality was in our view underestimated by the Judge. We do not accept Mr. Galbraith’s submission that this rules out the possibility of an arrangement or understanding to confirm that market reality but it certainly diminishes that possibility, absent specific reasons for Perry Corporation to make absolutely sure of the position and remove every vestige of doubt by an antecedent arrangement, notwithstanding that it would create a disclosure requirement under the Securities Markets Act. As discussed above, no such reasons have been put forward either with respect to the Rubicon position or for the Perry Corporation swaps in general. Indeed generally the evidence was that Perry Corporation normally exits swaps when it wishes to exit a position in the physical shares altogether and comparatively rarely acquires a physical shareholding from the swaps counter-parties.

  187. Secondly, there is the evidence of Mr. Cohen as to management controls in place at the bank. While again not ruling out the existence of an arrangement, it diminishes the possibility. More important is the fact that Mr. Cohen was actually in charge of the hedge shares but was unaware of any arrangement. He would have had the power to defeat such an arrangement, at least temporarily, by allowing the shares to be used for other purposes. Any arrangement that did not include Mr. Cohen, therefore, could not have removed the remaining uncertainty as to the availability of the shares. This points strongly to there having been no arrangement with Deutsche Bank.

  188. After careful consideration, we are satisfied that the factors that could raise a reasonable suspicion of an arrangement are clearly outweighed by those pointing to there being no arrangement, but merely the operation of market reality. Market reality meant (in a practical business sense) that the shares would be available for repurchase if required. Perry Corporation was aware of that market reality. No reasons have been put forward to explain why Perry Corporation would need to enter into an arrangement in the face of that market reality. In addition, the alleged arrangement would not have improved on the market reality because Mr. Cohen was not involved. We are satisfied therefore on the balance of probabilities that there was no arrangement in relation to the reacquisition of the Rubicon hedge shares held by Deutsche Bank and that the Judge was in error when she held that GPG had proved the existence of an arrangement.

  189. On the basis of all the other factors she identified, as well as the fact that in her view there had been an arrangement with Deutsche Bank, the Judge (at para [223]) also concluded that there was an arrangement with UBS Warburg. In reaching this conclusion Potter J referred to the pattern of the dealings and transactions by Perry Corporation with UBS Warburg which essentially mirrored those with Deutsche Bank, and said that she had heard nothing from Mr. Rosen to suggest otherwise, and that Mr. Dozier of UBS Warburg had not given evidence.

  190. If the Judge could properly have been satisfied that there was an arrangement with Deutsche Bank it may well have been reasonable for her to suspect an arrangement with the other counter-party. Such an inference may have been able to have been more readily drawn, as discussed earlier, by the absence of any witnesses from UBS Warburg who had had any direct dealings with the swaps or the hedge. As indicated above, however, we have found that most of the factors relied on by the Judge do not point (or at least do not strongly point) to there having been an arrangement or understanding with either Deutsche Bank or UBS Warburg and that the evidence of management controls and division of function within the banks should not have been treated as neutral. We have also found, on the balance of probabilities, that there was no such arrangement with Deutsche Bank. In these circumstances there cannot, in our view, be reasonable grounds to suspect an arrangement with UBS Warburg either.

  191. There were also significant differences between the terms of the UBS Warburg and the Deutsche Bank swaps. In the case of the UBS Warburg swaps, the termination price was set at the price at which the hedge was unwound while the early termination provision was on three days notice only. These provisions, in our view, mean that, in any practical business sense, the ability to repurchase the hedge shares on unwind of the swaps was inevitable in the case of UBS Warburg. There can have been no need for an arrangement in such circumstances.

  192. We conclude, therefore, that there can be no reasonable grounds to suspect the existence of an arrangement or understanding with either Deutsche Bank or UBS Warburg.

    DID SECTION 5(2) APPLY?

  193. In GPG’s alternative submission there was a relevant interest under s5(2), because Deutsche Bank and UBS Warburg were "accustomed to act" in accordance with Perry Corporation’s directions, instructions or wishes in relation to the acquisition or disposition of the Rubicon shares. Potter J found it unnecessary to consider whether there was a relevant interest under s5(2), given her findings in respect of s5(1)(f), but she did comment that GPG’s submission was less strongly founded in this regard.

  194. The policy behind s5(2) would appear to be that the provision of an informed market requires an ability to look behind the person who holds the relevant interest to a person who exercises de facto control over the securities. Section 5(2), therefore, gives an ability to look at substance over form. The phrase "accustomed to act" is used in a number of different contexts and in particular in relation to shadow or de facto directors. For example s126(1)(b) of the Companies Act 1993 provides that a director includes a person in accordance with whose directions or instructions a person occupying the position of director (whatever name is used to describe the position) or the board may be required or is accustomed to act.

  195. In Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180, 183, "accustomed to act" was discussed in the context of the English Insolvency Act, which defined a shadow director as "a person in accordance with whose directions or instructions the directors of the company are accustomed to act". Millett J interpreted the section as requiring "a pattern of behaviour in which the board did not exercise any discretion or judgment of their own, but acted in accordance with the directions of others". An identical definition of shadow director in the English Company Directors Disqualification Act 1986 was discussed by the English Court of Appeal in Secretary of State for Trade and Industry v Deverell [2000] 2 All ER 365, 376. In that case Morritt LJ, with whom Potter LJ and Morison J agreed, accepted the submission of the Secretary of State that all that is required is that what is said by the shadow director to the board is usually followed over a wide enough area and for long enough. This formulation of "accustomed to act" would not appear to require the same degree of subservience as Millett J required in Hydrodan.

  196. There has been little discussion of the phrase "accustomed to act" in New Zealand. In Dairy Containers Ltd v NZI Bank Ltd and Auditor-General [1995] 2 NZLR 30, 90 (HC) Thomas J said that the question was one of fact as to whether the directors are accustomed to act on the directions or instructions of another person. Under the equivalent Australian legislation, s60 of the Corporations Law, Finn J held in Australian Securities Commission v AS Nominees Ltd [1995] 133 ALR 1, 52 (FCA) that there need not be directions or instructions embracing all matters involving the board. What was instead required was that, as and when the directors are directed or instructed, they are accustomed to act in accordance with such directions or instructions. Again a lesser degree of subservience is required than in Hydrodan.

  197. Section 5(2) of the Securities Markets Act is concerned not only with directions and instructions, words with a mandatory effect, but is phrased in wider terms as including "wishes", a word with a more voluntary or less compellable connotation. This may mean that a lesser degree of subservience, even than that set out in Deverell and AS Nominees, would be appropriate in this context.

  198. We do not need to decide on the appropriate test because, even on the less stringent test, it would be difficult to argue that Perry Corporation’s equity swap counter-parties were accustomed to act in accordance with Perry Corporation’s wishes in relation to the Rubicon shares. Although the communication (Perry Corporation’s wish to unwind the swaps and purchase shares) and the consequence (the shares are purchased by Perry Corporation) are clear, there are only three specific occasions in evidence relating to Rubicon shares – the partial unwind with one counter-party and the final unwind with both. In addition, these examples arose in circumstances where the underlying Rubicon shares were almost inevitably going to be held as a hedge by the banks and where it was in the bank’s own commercial interests to sell those shares to Perry Corporation.

  199. With regard to Perry Corporation’s swaps generally, the evidence was that it did not usually sell shares to counter-parties on entry into an equity swap and on unwind did not usually acquire the underlying shares, it being the usual practice for the swap counter-party to sell the hedge into the market. As we have observed earlier, Mr. Vernon’s evidence was that, in the last 392 equity swap trades in the six months to 28 November 2002, Perry Corporation acquired the underlying shares on unwind in only 41 cases. In only 24 cases did Perry Corporation sell shares to counter-parties upon entry into swaps and, as indicated above, there was no evidence as to the correlation between the 24 sold in and the 41 cases of physical shares acquired on unwind. The percentage of cases where physical shares were acquired appears in line with market practice. As indicated earlier, Mr. Cohen estimated that in 85-90% of cases swaps were cash settled.

  200. It is true that there was no evidence as to the reasons for acquisition in the 41 cases and no evidence that a purchase by Perry Corporation had ever been refused by the banks. Evidence was given that normally swaps are unwound when Perry Corporation wished to exit a stock position altogether and that there are adverse taxation consequences with a return to physical shares if the swap is "in the money" or if the termination is prior to one year from entry into the swap. It may therefore be inferred that it would not be usual for Perry Corporation to wish to purchase the hedge shares when a swap is unwound. Even on the basis of that inference, we stress that it must be these particular counter-parties, Deutsche Bank and UBS Warburg, that are accustomed to act in accordance with Perry Corporation’s directions, instructions or wishes. The evidence is not sufficient to draw any conclusions about whether these banks were accustomed to act in accordance with Perry Corporation’s directions, instructions or even wishes, in relation to hedge shares held by its swap counter-parties.

  201. It is clear too that, as a general phenomenon in the market, there is consultation between the parties to swaps when they are unwound as to the timing and means of unwind and sale of any hedge shares. This stems from commercial considerations such as a concern to provide flexibility and to ensure minimal market disruption. A sale of hedge shares to a counter-party (if the counter-party wishes to buy) minimises transaction costs and risk for the counter-parties. In this regard counter-parties can be seen as operating in their own commercial interests. These interests may coincide with their clients’ interests and they may also be motivated by a desire to please the clients but we do not consider that s5(2) is directed at such situations.

    Potter J

  202. As there are no reasonable grounds for suspecting that Perry Corporation had a relevant interest at the requisite time and s5(2) does not apply, no question of orders under s32 of the Securities Markets Act arises.

    RESULT AND COSTS

  203. The Court being unanimous Perry Corporation’s appeal is allowed and Potter J’s orders are set aside.

  204. Costs of $18,000 are awarded against GPG in favour of Perry Corporation and of $10,000 in favour of Rubicon plus in each case reasonable disbursements, including travel and accommodation costs for two counsel, to be set by the Registrar if necessary.

  205. Leave is reserved to file submissions in this Court as to the appropriate orders for costs in the High Court. Any submissions on behalf of Perry Corporation are to be filed on or before 18 November 2003. Those of Rubicon are to be filed on or before 25 November 2003. Those of GPG are to be filed on or before 2 December 2003. Any submissions in reply are to be filed by Perry Corporation on or before 9 December 2003.

    Keith J

  206. I agree with the judgment of Glazebrook J, except in one respect, and with the conclusion she reaches. The exception concerns the difficulties presented by the drafting of the 1988 Act and particularly s30 (her paras [32]-[51]).

  207. The Court has power under s30 to make the orders provided for in s32 in certain circumstances relating to non compliance or suspected non compliance with provisions of the Act.

  208. It is suspected non compliance – to put it fully, the existence of reasonable grounds to suspect non compliance – that causes difficulties in this case, as in others. The suspected non compliance may be with ss20, 21, 22 and 28. Sections 20, 21 and 22 require substantial security holders to notify their relevant interest, changes in the quantity of the interest of more than 1%, and changes in the nature of the interest. Those obligations are stated in objective terms. There is either a breach of obligation or there is not. No breach occurs merely because a suspicion of breach arises. One exactly matching order available to the Court is an order directing the substantial security holder to comply with the provisions (s32(1)(a)). That order makes sense of course only if the substantial security holder has not complied with its obligations. Actual non compliance must also be established if persons who have sold or bought securities at a time when a substantial security holder has not complied with ss20, 21 or 22 can recover from the substantial security holder the difference in value (s34). And even that entitlement, dependent as it is on a finding of breach, may be denied or reduced if the Court is satisfied that the failure of the substantial security holder to comply with ss20, 21 or 22 was not deliberate or should be excused (s34(6)).

  209. Under s30, non compliance with s28 may be actual (s30(b)) or suspected (s30(c)). Jurisdiction in respect of s29 exists only in the event of actual non compliance (s30(b)). Again, for actual non compliance, there are exactly matching orders under s32(1)(b) and (c): an order directing a person to comply with the notice given under s28 or under s29.

  210. One of the other orders, provided for in s32(1)(h), may also be directed at "substantial security holder" – not someone who is merely suspected to be a substantial security holder. In that it matches para (a).

  211. I return to the situations of suspected non compliance. A critical initial point is that s30(a) does not on its face relate the reasonable ground to suspect to the issue whether someone is a substantial security holder or not. The Court may make one of the s32 orders where there are reasonable grounds to suspect that a substantial security holder has not complied with ss20, 21 or 22. Section 30(a) does not say where there are reasonable grounds to suspect that a holder of securities has not complied with those provisions. Rather, the reasonable grounds to suspect is of contravention by a person who is a substantial security holder.

  212. The obligations under s20(1) were transitional, relating to those who on 1 January 1989 (the date of the commencement of the 1988 Act) were substantial security holders. They had to give the detail required by s20(2) and related regulations. There could be reasonable suspicion about the contravention of those requirements. The same is true of the ongoing obligations under s20(3). Under s21, as well, there may be reasonable grounds to suspect contravention by an actual substantial security holder of the requirements of subsections (2) and (4). So, too, with the obligations under s22.

  213. That is to say, the provisions of s30(a) do have effect if the reference to substantial security holder is read, as it says, as meaning an actual substantial security holder and not a reasonably suspected one. This is not a case where a particular interpretation appears to deprive a legislative measure of effect.

  214. There are two other reasons for adhering to the literal meaning. One is the reluctance of the courts to accord legislative language a subjective meaning unless the language is clearly to that effect. A second reason is provided by the potentially draconian orders, taking away property rights, that may be made under s32. The law should strain against a reading allowing such orders, involving the taking of property without the status of substantial security holder and accordingly of breach being established (see e.g. Francis Bennion (Statutory Interpretation (4th ed 2002) 723-728).

  215. I do recognise that under this legislation, given the very extensive array of powers which Parliament has conferred in s32, the "punishment may [not] fit the crime", but the legislation is still to be seen in a broader context of established legal policy and principle. I accept that the interpretation I am adopting does not relate to the subjective wording in respect of meeting the requirements. In practice, however, that may not be a problem since, as Heron J said in Securities Commission v Honor Friend Investment Ltd (1991) 5 NZCLC 67, 512, that is likely to be a matter of record. In any event, as I read the legislation, it does make that distinction on its face.

  216. It is the case that in Meridian Global Funds Management Asia Ltd v Securities Commission [1994] 2 NZLR 291, 296 (on appeal from the Honor Friend case), this Court did, as had Heron J, apply the reasonable ground to suspect test to the existence of the relevant interest, but there is no indication that either Court had the precise wording of s30(a), read with ss20-22 and 32, brought to its attention. In a practical sense this Court did get near to the position I am proposing when it said that if the alleged offender established on a balance of probabilities that it had not acquired the interest, there would no longer be reasonable grounds to suspect that it had the interest. But that approach, by putting the onus on the alleged offender rather than on those who under s31 may bring the proceeding, may be questioned as a matter of principle. And what if the Court is brought to the position, on a balance of probabilities, that it cannot determine that there is a contravention, but it still has reasonable grounds to suspect?

  217. It may well be the case that in practice it is highly unlikely, as William Young J has put it, that a Court would make an order with substantive effect unless it was satisfied that it was at least more likely than not that a particular breach had occurred (Richmond Ltd v PPCS Ltd (2003) 9 NZCLC 263, 115). I prefer however to get to that result directly, as a matter of interpretation rather than through the exercise of the power and discretion conferred by s32. The party bringing the proceeding must establish on the balance of probabilities that the security holder is a substantial security holder.

  218. I take the point that ss30-32 may be aimed at two distinct matters – at emergency measures, designed to stop particular securities being marketed or employed for a short period, and orders with final substantive effect, such as compulsory disposal or forfeiture. As much legislative practice shows, reasonable (or good) grounds (or reasons) to suspect (or believe) are frequently all that is required if preliminary safeguarding measures are to be taken, while substantive final rulings will require a breach of obligation to be established, on a civil or criminal standard as appropriate. The legislature has not however made that distinction in the present case. It might be thought that it should.

APPENDIX ONE

DIAGRAMMATICAL REPRESENTATION OF SWAP TRANSACTION

Party A

(Perry Corporation)

(Fixed or Floating Amount Payer)

Payment of positive return on notional underlying shares

Payment of negative return on notional underlying shares

Payment of return based on financing cost of holding notional underlying shares

Party B

(Deutsche/UBS Warburg)

(Equity Amount Payer)

APPENDIX TWO

PERSONNEL

PERRY CORPORATION

Richard Perry:

Second Defendant, sole shareholder and President of Perry Corporation

Carl Berg:

Managing Director/Portfolio Manager of Perry Corporation

Lance Rosen:

Head Trader, Perry Corporation

William Vernon:

Chief Financial Officer, Perry Corporation (until 1 July 2002)

(Perry Capital is the employer of all United States-based professionals. It provides services to Perry Corporation pursuant to a management contract. For ease of reference we refer to all personnel as being from Perry Corporation).

DEUTSCHE BANK

Roger Cohen:

Director of Equities Division, Deutsche Bank, Sydney

Sanjay Madan:

Salesperson, Sales Desk of Deutsche Bank, New York

Allan Goco:

Equity Derivatives salesperson, Deutsche Bank, Hong Kong

Julian Sale:

Head of Equity Swaps Business, Deutsche Bank, New York

UBS WARBURG

John Dozier:

Trader, Sales Desk of UBS Warburg (AG), Connecticut

David Gray:

Head of Prime Broking Business and Hedge Funds Services, UBS Warburg, Australia

Simon Lloyd:

Hedge Fund salesperson, UBS Warburg, Sydney

RUBICON

Luke Moriarty:

Chief Executive Officer and Director of Rubicon

Mark Taylor:

Chief Financial Officer and Company Secretary of Rubicon

GUINNESS PEAT GROUP (GPG)

Anthony Gibbs:

Director of Ithaca (Custodians) Ltd and GPG

Appendix Three

CHRONOLOGY OF KEY EVENTS

22 Jan 2001

Rubicon incorporated following the Court approved separation of Fletcher Challenge Ltd.

26 Mar 2001

Rubicon lists. Perry Corporation holds 14,832.500 shares (approximately 4.2% arising from its shareholding in Fletcher Energy Ltd).

6 Apr 2001

Perry Corporation interest in Rubicon totals 35,921,569 shares (10.18%).

2 May 2001

First Perry Corporation substantial security holder notice (SSHN) is filed disclosing relevant interest in 35,921,569 shares (10.18%).

30 May 2001

Email from Mr. Madan (Deutsche Bank) to Mr. Rosen (Perry Corporation):

We are okay to take 14mil RBC NZ shares in swap.

31 May 2001

Perry Corporation sells 14m shares to Deutsche Bank and 17m shares to UBS Warburg and enters into matching swaps in relation to Rubicon shares. Perry Corporation’s shareholding in Rubicon reduces to 2.89%.

1 & 5 Jun 2001

Perry purchases Rubicon shares. Holdings as at 1 June are 4.895% (as recorded in second SSHN of 5 June), and increases to 4.966% on 5 June.

5 Jun 2001

Perry Corporation files second SSHN showing that Perry Corporation has ceased to be a substantial security holder, having reduced its physical holdings to 4.895% (as at 1 June 2001).

6 Jun 2001

Perry Corporation transfers 10m shares to Deutsche Bank. Perry Corporation enters equity swaps with Deutsche Bank (10m). Physical shareholding reduces to 2.13%.

29 Aug 2001

Perry Corporation sells 12.5m shares into the Rubicon buy-back at 83 cents. Perry Corporation is short by 4,975,831 shares.

3-4 Sept 2001

Perry Corporation buys 1.2 million shares on the market. Perry Corporation unwinds 5m swap and purchases hedge shares from (Deutsche Bank). Deutsche Bank transfers 5m shares to Perry Corporation. Perry Corporation’s physical shareholding is now less than 1%.

10 Sept 2001 to 5 Jun 2002

Perry Corporation increases holding from 1,244,169 shares to 8,596,569 shares (3.08%)

3 Jul 2002

GPG book build. GPG purchases 55,437,224 Rubicon shares (19.8%).

8 Jul 2002

(NZ time 8am: NY time, 7 Jul 4pm)

Mr. Gibbs (GPG) meets with Rubicon directors – Messrs Moriarty, Andrews and Fletcher.

8 Jul 2002

(NZ time 11.36am, NY time, 7 Jul 7.36pm)

Mr. Moriarty telephones Mr. Berg after the meeting with Mr. Gibbs (and before the Rubicon Board meeting at noon) and they speak for 20 minutes.

8 Jul 2002

(NZ time 4.21pm: NY time, 0.21am)

Mr. Moriarty email to Mr. Berg:

Will wait until u are ready, but now that someone else knows u should not delay too long to ensure u are the ones that announce it first!

8 Jul 2002

(NY time, 11.13 am: NZ time, 9 Jul 3.13am)

Perry Corporation (Mr. Rosen) telephone conversation with Deutsche Bank (Mr. Madan) – see Appendix Four.

9 Jul 2002

(NY time 10.28am: NZ time 10 Jul 2.28am)

Mr. Berg sends draft press release to Mr. Moriarty.

10 Jul 2002

Further conversation between Mr. Rosen and Madan. Mr. Rosen tells Mr. Madan to "unwind the swap".

11 Jul 2002

Perry Corporation unwinds swaps with UBS Warburg and Deutsche Bank. Perry Corporation purchases 17m shares from UBS Warburg and 19m from Deutsche Bank.

12 Jul 2002

Perry Corporation files SSHN – showing total shareholding of 44,596,569 (15.98%).

14 Jul 2002

Mr. Moriarty email to Mr. Berg: "I definitely need your shares".

19 Jul 2002

Rubicon’s first annual meeting of shareholders.

25 Jul 2002

Telephone conversation between Mr. Perry and Mr. Gibbs.

APPENDIX FOUR

TRANSCRIPT OF MR. ROSEN’S TELEPHONE CONVERSATION WITH MR. MADAN OF 8 JULY 2002

Date: NY 8 July (NZ 9 July) Time: NY 11.13 a.m. (NZ 3.13 a.m.)

MR. ROSEN:

Okay, great. And then just another issue that I want to talk to you about is Rubicon. We have got about, I think, 17 million or 19 million shares in swap with you guys.

MR. MADAN:

That is in New Zealand?

MR. ROSEN:

Yeah. New Zealand.

MR. MADAN:

Yeah. Yeah.

MR. ROSEN:

Actually, it’s 19 million with you guys.

MR. MADAN:

Yeah.

MR. ROSEN:

And I am going – I don’t know if you have been following the situation over in New Zealand, but there’s been – there’s been a flurry of activity –

MR. MADAN:

Yeah.

MR. ROSEN:

- over the past several days.

MR. MADAN:

Didn’t somebody take a stake or something?

MR. ROSEN:

Yeah, that’s right. That’s right.

MR. MADAN:

Jumped up a huge –

MR. ROSEN:

GPG – GPG came in and sort of through a dawn raid they actually paid – the stock’s at 56, they paid 75.

MR. MADAN:

Right.

MR. ROSEN:

For like a 15 per cent – for 15 per cent.

MR. MADAN:

Right.

MR. ROSEN:

In like an off-board – off-market transaction, which actually, uhm, took them to about 19 – just under 20 per cent stake.

MR. MADAN:

I see.

MR. ROSEN:

And so what we are gonna want to do is we want to make sure that we are in a position should – it sounds as if these guys, you know, are – are supportive of management, but we – we just want to make sure that we have those shares as of the record date, that we are the beneficial holders of interest as of the record date, so that we have the freedom and the flexibility –

MR. MADAN:

Oh, yes, I see.

MR. ROSEN:

- to deal with those shares as we would like – as we want to.

MR. MADAN:

So, do you know when the record date is?

MR. ROSEN:

So it doesn’t turn into a contested situation.

MR. MADAN:

Sure. What is the record date for this, do you know?

MR. ROSEN:

I believe it is July 15th, but I just want to put you guys on notice that I am probably going to be coming back to you in the not too distant future to –

MR. MADAN:

Take the shares back.

MR. ROSEN:

- unwind the swap.

MR. MADAN:

Sure. Let’s do this quickly.

MR. ROSEN:

But in the meantime, Sanjay, I want – because it is such a high-profile situation, and we are going to be under the microscope here –

MR. MADAN:

Right.

MR. ROSEN:

I want to make sure that we are – that we are sort of abiding by the letter and spirit –

MR. MADAN:

Sure.

MR. ROSEN:

- of any New Zealand Stock Exchange Regulations –

MR. MADAN:

I understand.

MR. ROSEN:

- down there to the T. And so I am working with my lawyers, and my lawyers would – my lawyer would like somebody in your compliance department, or whoever the right person is to talk to on your end in New Zealand.

MR. MADAN:

Right.

MR. ROSEN:

So that he could co-ordinate and we can make sure that our interpretation of all the applicable rules and regulations are the same as your interpretation of all the applicable rules and regulations.

MR. MADAN:

Right.

MR. ROSEN:

So could you give – can you come back to me with a contact – with a person and contact information?

MR. MADAN:

Sure. Let me – right. I will have to be on the phone tonight, then, with these guys. Can I call you first thing in the morning? If I find the information today, right now, of course, I will give it to you.

MR. ROSEN:

Yeah.

MR. MADAN:

(Inaudible).

MR. ROSEN:

Just ASAP, I mean, if we can just have it within the next day or two.

MR. MADAN:

Okay.

MR. ROSEN:

That’s when I’d like to do it.

MR. MADAN:

Okay.

MR. ROSEN:

Okay? Bye.

MR. MADAN:

Bye.

APPENDIX FIVE

SECURITIES MARKETS ACT

This sets out the legislation as it was prior to the amendments made on 1 December 2002 when the Act was renamed. The amendments made on 1 December 2002 were minor, except in relation to s35A which was repealed.

2.

substantial security holder in relation to a public issuer or other body, means a person who has a relevant interest in 5 percent or more of the voting securities of that public issuer or body:

voting security in relation to a public issuer or other body, means a security of the public issuer or body which confers a right to vote at meetings of members or shareholders (whether or not there is any restriction or limitation on the number of votes that may be cast by or on behalf of the holder of the security), not being a right to vote that, under the conditions attached to the security, is exercisable only in one or more of the following circumstances:

(a)

During a period in which a dividend (or part of a dividend) in respect of the security is in arrears:

(b)

On a proposal to reduce the capital of the public issuer or body:

(c)

On a proposal that affects rights attached to the security:

(d)

On a proposal to put the public issuer or body into liquidation:

(e)

On a proposal for the disposal of the whole of the property, business, and undertaking of the public issuer or body:

(f)

During the liquidation of the public issuer or body;

and includes a security which, in accordance with the terms of the security, is convertible into a security of that kind.

5

Meaning of "relevant interest"

(1)

For the purposes of this Act a person has a relevant interest in a voting security (whether or not that person is the registered holder of it) if that person—

(a)

Is a beneficial owner of the voting security; or

(b)

Has the power to exercise any right to vote attached to the voting security; or

(c)

Has the power to control the exercise of any right to vote attached to the voting security; or

(d)

Has the power to acquire or dispose of the voting security; or

(e)

Has the power to control the acquisition or disposition of the voting security by another person; or

(f)

Under, or by virtue of, any trust, agreement, arrangement, or understanding relating to the voting security (whether or not that person is a party to it)—

(i)

May at any time have the power to exercise any right to vote attached to the voting security; or

(ii)

May at any time have the power to control the exercise of any right to vote attached to the voting security; or

(iii)

May at any time have the power to acquire or dispose of, the voting security; or

(iv)

May at any time have the power to control the acquisition or disposition of the voting security by another person.

(2)

Where a person has a relevant interest in a voting security by virtue of subsection (1) of this section and—

(a)

That person or its directors are accustomed or under an obligation, whether legally enforceable or not, to act in accordance with the directions, instructions, or wishes of any other person in relation to—

(i)

The exercise of the right to vote attached to the voting security; or

(ii)

The control of the exercise of any right to vote attached to the voting security; or

(iii)

The acquisition or disposition of the voting security; or

(iv)

The exercise of the power to control the acquisition or disposition of the voting security by another person; or

(b)

Another person has the power to exercise the right to vote attached to 20 percent or more of the voting securities of that person; or

(c)

Another person has the power to control the exercise of the right to vote attached to 20 percent or more of the voting securities of that person; or

(d)

Another person has the power to acquire or dispose of 20 percent or more of the voting securities of that person; or

(e)

Another person has the power to control the acquisition or disposition of 20 percent or more of the voting securities of that person—

that other person also has a relevant interest in the voting security.

(3)

A body corporate or other body has a relevant interest in a voting security in which another body corporate that is related to that body corporate or other body has a relevant interest.

(4)

A person who has, or may have, a power referred to in any of paragraphs (b) to (f) of subsection (1) of this section, has a relevant interest in a voting security regardless of whether the power—

(a)

Is expressed or implied:

(b)

Is direct or indirect:

(c)

Is legally enforceable or not:

(d)

Is related to a particular voting security or not:

(e)

Is subject to restraint or restriction or is capable of being made subject to restraint or restriction:

(f)

Is exercisable presently or in the future:

(g)

Is exercisable only on the fulfilment of a condition:

(h)

Is exercisable alone or jointly with another person or persons.

(5)

A power referred to in subsection (1) of this section exercisable jointly with another person or persons is deemed to be exercisable by either or any of those persons.

(6)

A reference to a power includes a reference to a power that arises from, or is capable of being exercised as the result of, a breach of any trust, agreement, arrangement, or understanding, or any of them, whether or not it is legally enforceable.

Part II

Disclosure of Interests of Substantial Security Holders in Public Issuers

20.

Substantial security holders to notify relevant interests in public issuers

(1)

Every person who, on the commencement of this section, is a substantial security holder in a public issuer, shall give notice that the person is a substantial security holder in the public issuer to—

(a)

The public issuer; and

(b)

Any stock exchange on which the securities of the public issuer are listed.

(2)

Every notice under subsection (1) of this section shall—

(a)

Be in the prescribed form; and

(b)

Contain the prescribed information; and

(c)

Be accompanied by, or have annexed, such documents, certificates, and statements as may be prescribed; and

(d)

Be given in the prescribed manner; and

(e)

Be given within 14 days after the commencement of this section.

(3)

Every person who, after the commencement of this section, becomes a substantial security holder in a public issuer shall give notice that the person is a substantial security holder in the public issuer to—

(a)

The public issuer; and

(b)

any stock exchange on which the securities of the public issuer are listed.

(4)

Every notice under subsection (3) of this section shall—

(a)

Be in the prescribed form; and

(b)

Contain the prescribed information; and

(c)

Be accompanied by, or have annexed, such documents, certificates, and statements as may be prescribed; and

(d)

Be given in the prescribed manner; and

(e)

Be given as soon as the person knows, or ought to know, that the person is a substantial security holder in the public issuer.

21.

Substantial security holders to notify changes in relevant interests in public issuers

(1)

Where—

(a)

There is a change in the total number of voting securities of a public issuer in which a substantial security holder has a relevant interest; and

(b)

The difference between the number of such securities immediately after the change and the number of securities required to be stated in the last notice given by the substantial security holder to the public issuer under this part of the Act is equal to 1 percent or more of the total number of issued voting securities of the public issuer —

the substantial security holder shall give notice of the change to—

(c)

The public issuer; and

(d)

Any stock exchange by which the securities of the public issuer are listed.

(2)

Every notice under subsection (1) of this section shall—

(a)

Be in the prescribed form; and

(b)

Contain the prescribed information; and

(c)

Be accompanied by, or have annexed, such documents, certificates, and statements as may be prescribed; and

(d)

Be given in the prescribed manner; and

(e)

Be given as soon as the person knows, or ought to know, of the change.

(3)

Where a person ceases to be a substantial security holder in a public issuer that person shall give notice that that person has ceased to be a substantial security holder in the public issuer to—

(a)

The public issuer; and

(b)

Any stock exchange by which the securities of the public issuer are listed.

(4)

Every notice under subsection (3) of this section shall—

(a)

Be in the prescribed form; and

(b)

Contain the prescribed information; and

(c)

Be accompanied by, or have annexed, such documents, certificates, and statements as may be prescribed; and

(d)

Be given in the prescribed manner; and

(e)

Be given as soon as the person knows, or ought to know, that the person has ceased to be a substantial security holder in the public issuer.

22.

Substantial security holders to notify changes in nature of relevant interests

(1)

Where there is any change in the nature of any relevant interest held by a substantial security holder in the voting securities of a public issuer the substantial security holder shall give notice of the change to—

(a)

The public issuer; and

(b)

Any stock exchange by which the securities of the public issuer are listed.

(2)

Every notice under subsection (1) of this section shall—

(a)

Be in the prescribed form; and

(b)

Contain the prescribed information; and

(c)

Be accompanied by, or have annexed, such documents, certificates, and statements as may be prescribed; and

(d)

Be given in the prescribed manner; and

(e)

Be given as soon as the substantial security holder knows, or ought to know, of the change.

26.

Public issuers to publish identity of substantial security holders

(1)

Every public issuer that is a company (but not an overseas company) shall, in a note accompanying its statement of financial position laid before the public issuer in general meeting, state –

(a)

The names of all persons who, according to the file kept under section 25 of this Act, are substantial security holders in the public issuer, as at a date not earlier than 3 months before the statement of financial position is laid before the public issuer in general meeting; and

(b)

The number of voting securities of the public issuer in which, according to the file, each substantial security holder has a relevant interest as at that date; and

(c)

The total number of issued voting securities of the public issuer as at that date.

(2)

Every other public issuer shall, not later than the 30th day of June in each year, send to every holder of its voting securities in New Zealand a notice showing, as at a date specified in the notice (but not a date earlier than 3 months before the date the notice is sent) –

(a)

The names of all persons who, according to the file kept by it under section 25 of this Act, are substantial security holders of the public issuer; and

(b)

The number of voting securities of the public issuer in which, according to the file, each substantial security holder has a relevant interest; and

(c)

The total number of issued voting securities of the public issuer.

(3)

No civil or criminal proceedings lie against a public issuer for false or misleading information contained in the note required by subsection (1) of this section, or the notice required by subsection (2) of this section, as the case may be, if the information was derived by the public issuer under this Part of this Act and the public issuer did not know that the information was false or misleading.

(4)

A public issuer who fails to comply with a requirement of this section commits an offence and is liable on summary conviction to a fine not exceeding $10,000.

28.

Public issuer may require disclosure of relevant interests

(1)

A public issuer may, and at the written request of a holder of securities or holders of securities of the public issuer holding in aggregate not less than 5 percent of the voting securities of the public issuer shall, by written notice, to a person who is registered as the holder of voting securities in that public issuer, require that person to disclose to the public issuer –

(a)

The name and address of every person who holds a relevant interest in those voting securities and the nature of that interest; and

(b)

To the extent that the registered holder is unable to supply any of the information referred to in paragraph (a) of this subsection in relation to a person holding a relevant interest, such other particulars as will, or are likely to, assist in identifying that person and the nature of that interest.

(2)

The notice shall be in the prescribed form or to like effect.

(3)

A registered holder of voting securities in a public issuer to whom a notice is given under this section shall disclose to the public issuer the information referred to immediately and in writing.

29.

Public issuer may require person who holds relevant interest to disclose information

(1)

A public issuer may, and at the written request of a holder of securities or holders of securities of the public issuer holding in aggregate not less than 5 percent of the voting securities of the public issuer shall, by written notice, to any person who the public issuer believes has, or may have, a relevant interest in voting securities of the public issuer, require that person, for the purpose of assisting the public issuer to ascertain who is, or may be, a substantial security holder, to supply such information as it may specify.

(2)

The notice shall be in the prescribed form or to like effect.

(3)

A person to whom a notice is given under this section shall supply to the public issuer the information required immediately and in writing.

30.

Jurisdiction of Court to make certain orders

Where—

(a)

There are reasonable grounds to suspect that a substantial security holder has not complied with sections 20, 21, or 22 of this Act in relation to a public issuer; or

(b)

A person has not complied with section 28 or section 29 of this Act in relation to a public issuer; or

(c)

There are reasonable grounds to suspect that, in a case where a notice has been given under section 28 of this Act, the identity of every person who has a relevant interest in the voting securities of a public issuer and the nature of that interest have not been disclosed—

the Court may, on the application of a person referred to in section 31 of this Act, make 1 or more of the orders referred to in section 32 of this Act.

31.

Persons who may apply

The persons who may apply for an order are—

(a)

The Commission:

(b)

The public issuer:

(c)

A holder of securities in the public issuer:

(d)

A person who sold or purchased securities in the public issuer at a time when a substantial security holder had not complied with section 20 or section 21 or section 22 of this Act:

(e)

A person who has made—

(i) A take-over offer in accordance with section 4 of the Companies Amendment Act 1963 for securities of the public issuer; or

(ii) An offer for securities of the public issuer pursuant to any takeovers code that is in force under s28 of the Takeovers Act 1993,—

at a time when a substantial security holder had not complied with sections 20 to 22 of this Act (whether or not the offer has been accepted):

(f)

With the leave of the Court, any other person.

32.

Orders

(1)

The Court may make any of the following orders on an application under section 30 of this Act,—

(a)

An order directing a substantial security holder to comply with section 20 or section 21 or section 22 of this Act:

(b)

An order directing any person to comply with a notice under section 28 or section 29 of this Act:

(c)

An order directing any person named in the order to identify the persons who have relevant interests in any voting securities of the public issuer and the nature of those interests:

(d)

An order prohibiting the exercise of such period as the Court thinks fit of any right to vote attaching to any voting securities of the public issuer:

(e)

An order directing the public issuer not to make payment, or to defer making payment for such period as the Court thinks fit, of any sum or sums due from the public issuer in respect of any voting securities:

(f)

An order directing the public issuer not to register the transfer or transmission of all or any voting securities:

(g)

An order prohibiting the public issuer from issuing any securities in addition to, or in substitution for, or in replacement of, any voting securities:

(h)

An order restraining a substantial security holder from disposing of all or any voting securities of the public issuer or any relevant interest in them:

(i)

An order restraining a person who is, or who is entitled to be, registered as the holder of any voting securities of the public issuer from disposing of all or any voting securities or any relevant interest in them:

(j)

An order directing the disposal of any voting securities of the public issuer or any relevant interest in them:

(k)

An order directing the forfeiture of any voting securities of the public issuer:

(l)

An order declaring that the exercise of voting or other rights attaching to any voting securities of the public issuer is void and of no effect:

(m)

For the purposes of securing compliance with any other order made under this subsection, an order directing the public issuer, or any other person, to do or refrain from doing a specified act.

(2)

An order under subsection (1) of this section may be made on such terms and conditions as the Court thinks fit.

(3)

Without limiting subsection (2) of this section, an order made under subsection (1)(j) of this section may require—

(a)

That the voting securities are, or any interest in them is, disposed of within a time specified by the Court:

(b)

That neither the voting securities are, nor any interest in them is, disposed of to any specified person or class of persons:

(c)

That the voting securities are, or any interest in them is, disposed of in a manner and on terms specified by the Court:

(d)

That the proceeds of any disposition are—

(i)

Applied towards the costs of the application; or

(ii)

Paid in such amounts and to such persons as the Court specifies.

(4)

Before making an order under subsection (1) of this section the Court may direct that—

(a)

Notice of the application for the order is given to such persons as it thinks fit; and

(b)

Notice of the application is published in such manner as it thinks fit.

(5)

The following persons are entitled to appear and be heard at the hearing of an application—

(a)

The applicant:

(b)

The substantial security holder:

(c)

The registered holder of the voting securities:

(d)

The public issuer:

(e)

A person directed to be given notice of the application:

(f)

With the leave of the Court, any other person.

(6)

An order under subsection (1) of this section may be revoked, varied or suspended and on such terms and conditions, as the Court thinks fit.

34.

Liability of substantial security holder for failure to notify relevant interest

(1)

In any case where a person sells any securities in a public issuer to a substantial security holder in that public issuer who has not complied with section 20 or section 21 or section 22 of this Act, the Court may make an order directing the substantial security holder to pay to that person the amount by which the value of the securities exceeds the price payable.

(2)

In any case where a person buys any securities in a public issuer from a substantial security holder in that public issuer who has not complied with section 20 or section 21 or section 22 of this Act, the Court may make an order directing the substantial security holder to pay to that person the amount by which the price payable exceeds the value of the securities.

(3)

If—

(a)

A person sells securities in a public issuer to, or buys securities in a public issuer from, a person who is not a substantial security holder in the public issuer; and

(b)

At the time of the transaction a substantial security holder in that public issuer had not complied with section 20 or section 21 or section 22 of this Act—

the Court may, on application by that person—

(c)

Where the securities are sold, make an order directing the substantial security holder to pay to the seller the amount by which the value of the securities exceeds the price payable:

(d)

Where the securities are purchased, make an order directing the substantial security holder to pay to the purchaser the amount by which the price payable exceeds the value of the securities.

(4)

For the purposes of this section the value of securities shall be taken as—

(a)

In a case to which subsection (1) or subsection (3)(c) of this section applies, if the substantial security holder or a body corporate related to it makes a take-over offer (within the meaning of the Companies Amendment Act 1963), or makes an offer pursuant to any takeovers code that is in force under s28 of the Takeovers Act 1993, as the case may be,] for the securities of the public issuer within 6 months of any purchase by it or a person referred to in subsection (3)(c) of this section, as the case may be,—

(i)

The value of the consideration offered; or

(ii)

The value that would be determined in accordance with paragraph (b) of this subsection—

whichever is the higher:

(b)

In any other case, the value the securities would have had at the time of the sale or purchase if the notice had been given or the information that would have been included in the notice had become publicly available, as the case may be, on that date.

(5)

No application may be made under this section at any time later than—

(a)

Three years after the date on which the obligation of the substantial security holder to give notice under section 20 or section 21 or section 22 of this Act first arose; or

(b)

One year after the notice was given—

whichever is the earlier.

(6)

In any proceedings under this section if the Court is satisfied that the failure by a substantial security holder to comply with section 20 or section 21 or section 22 of this Act—

(a)

Was not deliberate; and

(b)

Should be excused—

the Court may, if it thinks fit—

(c)

Make an order directing that no order may be made against the substantial security holder under this section; or

(d)

Make an order reducing the maximum liability of the substantial security holder under this section to an amount specified by the Court.

35A

Evidence not otherwise admissible

In the exercise of its jurisdiction under this Part, the Court may receive in evidence any statement, document, or information that would not be otherwise admissible that may in its opinion assist it to deal effectively with the matter.


Cases

Jones v Dunkel (1959) 101 CLR 298; Meridian Global Funds Management Asia Ltd v Securities Commission [1994] 2 NZLR 291; Securities Commission v Honor Friend Investments Ltd (1991) NZCLC 67; Police v Anderson [1972] NZLR 233; Police v Cooper [1975] 1 NZLR 216; R v Sanders [1994] 3 NZLR 450; Richmond v PPCS (2003) 9 NZCLC 263; New Zealand Apple and Pear Marketing Board v Applefields Ltd [1991] 1 NZLR 257 (PC); Commissioner of Inland Revenue v BNZ Investments Ltd [2002] 1 NZLR 450 (CA); Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647 (HC); Commerce Commission v Caltex (1999) 9 TCLR 305 (HC); Australian Competition and Consumer Commission v CC (NSW) Pty Ltd (1999) 165 ALR 468 (FCA); Trade Practices Commission v Email (1980) 31 ALR 53 (FCA); Ical Ltd v County Natwest Securities Australia Ltd (1988) 13 ACLR 129 (NSW SC); Re Agreement of the Mileage Conference Group of the Tyre Manufacturers’ Conference Ltd [1966] 2 All ER 849; Nomoi Holdings Ltd v Elders Pastoral Holdings Ltd CA 79/00, 17 July 2001; Dilosa v Latec Finance (1966) 84 WN Pt 1 NSW 557; Claiborne Industries Ltd v National Bank of Canada (1989) 59 DLR (4th) 533 (CA Ont); Brandi v Mingot (1976) 12 ALR 551 (HCA); Dairy Containers v NZI Bank Ltd (1994) 7 PRNZ 465, 468 (HC); Innes v Ewing [1989] 1 NZLR 598 (HC); Pepi Holdings Ltd v BMW NZ Ltd & Tannadyce Investments Ltd CA22/97 25 August 1997; Payne v Parker [1976] 1 NSWLR 191 (NSW SC); O’Donnell v Reichard [1975] VR 916; Steele v Mirror Newspapers Ltd [1974] 2 NSWLR 348; Ward v Apprice (1704) 6 Mod Rep 264; 87 ER 1011; Tozer Kemsley case (1956) 94 CLR 384; Cubillo v Commonwealth of Australia (2000) 174 ALR 97 (FCA); Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180; Secretary of State for Trade and Industry v Deverell [2000] 2 All ER 365; Dairy Containers Ltd v NZI Bank Ltd and Auditor-General [1995] 2 NZLR 30 (HC); Australian Securities Commission v AS Nominees Ltd [1995] 133 ALR 1 (FCA)

Legislations

Securities Markets Act 1988: s.2, s.5, s.30, s.32

Antiquities Act 1975

Customs and Excise Act 1996

Arms Act 1983

Passport Act 1992

Crimes Act 1961

Summary Proceedings Act: s.198

Companies Act 1993: s126(1)(b)

Authors and other references

Securities Commission, "Report on Nominee Shareholdings in Public Companies: A Review of the Law and Practice with a Proposal for Reform" (1981)

Prof Williams, "Burdens and Standards in Civil Litigation" (2003) 25 Syd LR 165

James B Thayer, A Preliminary Treatise on Evidence at the Common Law (1898)

Adrian van Schie, Insider Trading, Nominee Disclosure and Futures Dealing: an Analysis of the Securities Amendment Act 1988 (Butterworths, 1994)

Wigmore on Evidence (3ed), 1949

Francis Bennion, Statutory Interpretation (4th ed 2002)

Representations

A R Galbraith QC and C M Stevens for Appellants (instructed by Phillips Fox, Wellington)

R J Asher QC and M R Dean for First and Second Respondents (instructed by Lowndes Jordan, Auckland)

J A Farmer QC and R J C Partridge for Third Respondent (instructed by Bell Gully, Auckland)


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