BEFORE THE TAKEOVERS PANEL

AND

REASONS FOR DETERMINATION

Preliminary

1. On 1 November 2007 the Panel gave notice of a meeting to be held under section 32 of the Act in relation to various aspects of the affairs of Kerifresh and its shareholders and prospective shareholders. That meeting was held in Auckland on 7 November 2007. The Panel published its determination from that meeting on 9 November 2007. The Panel also made or continued a number of restraining orders on that day.
2. The Panel is now publishing the reasons for its determination. This statement concludes by restating the determination itself.

Background

3. Kerifresh is an unlisted New Zealand incorporated company based in Northland. Its principal business is the production of lemons and other fruit. At all times since July 2001 its financial statements show that it had more than $20 million in gross assets. The share register showed it always had more than 50 shareholders throughout this period. As such Kerifresh was a code company for the purposes of the Act and the Code¹ and continued to be throughout the period that the transactions considered during these proceedings occurred.
4. When this view was challenged at the first Panel meeting the Panel did not uphold the challenge and found that Kerifresh was a code company in 2002 and has been since. The issue was not raised at the 7 November 2007 meeting.
5. Turners and Growers Limited ("TGL") is a New Zealand listed company.
6. On 1 October 2007 TGL gave notice under rule 41 of the Code of its intention to make a full takeover offer for Kerifresh. On the same date TGL lodged a complaint with the Panel alleging that a number of irregularities had occurred in transactions in Kerifresh shares over the previous 5 years.
7. After following the required procedural steps the Panel convened a meeting under section 32 of the Act on 16 October 2007 ("the first Panel meeting") to investigate various issues raised by TGL's complaint. The Panel issued its determination from that hearing on 18 October 2007.
8. The evidence provided to the Panel at the first Panel meeting, particularly by Hamish McHardy, Chairman of Kerifresh, gave the Panel information about his relationship with his son Jonathan, in particular that they were both trustees of the Murrayfield Trust which acquired 597,316 Kerifresh shares on 29 May 2002, at the same time that Hamish McHardy acquired 669,200 Kerifresh shares.
9. At the first Panel meeting the Panel determined that Hamish McHardy was an associate of Alan Thompson for the purposes of the Code in May 2002 because of certain share warehousing arrangements entered into between them relating to the acquisition of Kerifresh shares in May 2002. The question of whether Jonathan McHardy was also an associate of Alan Thompson, which may have had adverse consequences for the Murrayfield Trust, was not explored at the first Panel meeting. One of the reasons for this was that Jonathan McHardy did not attend the first Panel meeting and had not been advised of the possible consequences for him if he did not participate in that meeting. The issue of Jonathan McHardy's possible association with Alan Thompson was considered at the meeting of 7 November 2007 and is discussed in later paragraphs of this statement of reasons (see paragraph 35 onwards).
10. On 19 October 2007 the Panel received a further complaint from TGL relating to an offer for 335,000 Kerifresh shares made by Lawrence Fletcher on 18 October 2007 and circulated to Kerifresh shareholders by the Auckland law firm of Grove Darlow & Partners ("Grove Darlow"). TGL alleged that Grove Darlow was acting for Hamish McHardy and that Lawrence Fletcher was linked with Hamish McHardy and his son Jonathan McHardy in ways which suggested that they were associates for the purposes of the Code. If that were the case then the offer by Lawrence Fletcher would not comply with the Code because of the percentage of voting rights in Kerifresh already held or controlled or which would be held or controlled by the three of them in aggregate.
11. The Panel also decided to take the opportunity of the meeting of 7 November 2007 to satisfy itself regarding any possible association for Code purposes between Harold Burcham Thompson ("Harold Thompson") and his wife Helen Wern Thompson, who hold just under 5% of the voting rights in Kerifresh, and their son Alan Thompson and his wife Helen Louise Thompson. For reasons explained later (see paragraph 170 onwards) Harold Thompson was summonsed to the Panel's first meeting but did not attend that meeting.

Initial actions by the Panel in response to the second TGL complaint

12. Following receipt of the second complaint from TGL the Panel reviewed the information provided by TGL and undertook enquiries of its own with Grove Darlow.
13. The Panel ascertained that Grove Darlow's trustee company, GDP Trustee Limited ("GDPT"), had paid for 10,000 Kerifresh shares in August 2007.
14. As part of its enquiries the Panel requested information from the solicitors for the counterparties to the acquisition by GDPT.
15. The Panel initially met on Wednesday 24 October 2007 to consider the information available to it about the Lawrence Fletcher offer and also the new information arising from the first Panel meeting about the Murrayfield Trust's acquisition of Kerifresh shares in May 2002. After further enquiry the Panel met again on Tuesday 30 October 2007. At that meeting the Panel resolved:

    Alan Dougal Thompson ("Alan Thompson") and Helen Thompson held some 1,313,016 shares in Kerifresh, representing some 18.49% of the company's issued capital, at the time the Code came into force on 1 July 2001.

    Harold Burcham Thompson ("Harold Thompson") and Helen Wern Thompson held some 346,050 shares in Kerifresh, representing some 4.87% of the company's issued capital, at that time.

    On or about 29 May 2002 Philip Hamish McHardy ("Hamish McHardy") acquired 669,200 shares in Kerifresh. On the same day the trustees of the Murrayfield Trust, who the Panel learned at its meeting on 16 October 2007 were Jonathan Forbes McHardy (son of Hamish) and Hamish McHardy, acquired 597,316 shares in Kerifresh.

    At its meeting of 16 October 2007 the Panel determined that Hamish McHardy and Alan Thompson were associates for the purposes of the Code at the time of entering into the 2002 transaction.

    Hamish McHardy acknowledged that he and his son Jonathan undertook a number of investments together and that he considered he was probably an associate of Jonathan for the purposes of the Code.

    The Panel considers, on the basis of information available to it and which it received at its meeting of 16 October 2007, that Jonathan McHardy was an associate of Hamish McHardy in May 2002 and may have been, for the purposes of rule 4(1)(e) of the Code also an associate of Alan Thompson at that time.

    On the understanding that Hamish McHardy and Jonathan McHardy were joint trustees of the Murrayfield Trust and acquired 597,316 Kerifresh shares on 29 May 2002, that Jonathan McHardy was an associate of Hamish McHardy, that Hamish McHardy was an associate of Alan Thompson on 29 May 2002, that, in the circumstances, Jonathan McHardy may have been an associate of Alan Thompson, and given the level of shareholding in Kerifresh by both Alan Thompson and Hamish McHardy after the acquisition of the 597,316 Kerifresh shares, the Panel considers that the acquisition of 597,316 Kerifresh shares may have not been made in compliance with the fundamental rule of the Code.

    Turners and Growers allege that Harold Thompson and his wife Helen are associates of their son Alan Thompson and his wife Helen. If this were so it may have implications for the extent to which acquisitions by Alan Thompson and any other of his associates may breach the Code. The Panel was unable to resolve this issue satisfactorily at its meeting on 16 October 2007 because Harold Thompson did not attend the meeting. The Panel proposes to explore the nature of the relationship between Harold Thompson and his son Alan at the meeting being held on 7 November 2007.

    On or about 18 October 2007 Grove Darlow circulated a letter to existing shareholders of Kerifresh detailing an offer by one Lawrence Fletcher who is making an unconditional offer at $2 per share for 335,000 Kerifresh shares to add to 10,000 shares already held for him by GDP Trustee Limited.

    The Panel has been advised that Lawrence Fletcher is a friend of Jonathan McHardy, that Lawrence Fletcher discussed his investment intentions in Kerifresh with Hamish McHardy, and that Hamish McHardy made the initial contact with Grove Darlow concerning Lawrence Fletcher's proposed investment. The Panel has also learned that Alan Thompson may have been promoting and facilitating the acquisition of shares by Hamish McHardy, whether on his own behalf or on behalf of interests associated with him.

    The Panel considers that Lawrence Fletcher may be an associate of Jonathan McHardy and of Hamish McHardy and of Alan Thompson for the purposes of the Code, and/or may be acting on behalf of one or the other or both of the McHardys and Alan Thompson in making his offer.

    The current shareholdings of Jonathan McHardy and Hamish McHardy, as trustees of the Murrayfield Trust, amount to 617,316 or 7.89% of the voting rights in Kerifresh. The current shareholding of Sundry Investments Limited, Hamish McHardy's personal investment vehicle, in Kerifresh is 812,200, or 9.94% making a combined interest of 17.83%.

    The current shareholding of Alan and Helen Thompson in their own right and as shareholders of the Thompson Family Trust, of Anbran Trustee Company Limited (an associate of Alan Thompson), and of Helen Thompson in her own name, currently amount to 1,678,176 shares or 22.45% of the voting rights in Kerifresh.

    If Lawrence Fletcher is an associate of Jonathan and Hamish McHardy and/or of Alan Thompson then the acquisition of 345,000 Kerifresh shares, or 4.56% of the voting rights in Kerifresh would, when aggregated with the holdings controlled by Hamish and Jonathan McHardy and/or Alan Thompson, exceed 20% of the voting rights in Kerifresh. The Panel considers that Lawrence Fletcher, by making an offer to purchase up to 335,000 Kerifresh shares, may not have complied, may not be complying, and may intend not to comply with the fundamental rule of the Code.

    The Panel made interim restraining orders under section 32(2) of the Takeovers Act 1993 restraining Jonathan McHardy and Lawrence Fletcher from:

    1. exercising the voting rights attached to any of the shares they hold or control in Kerifresh; and
    2. acquiring or disposing of any voting securities in Kerifresh.

    The Panel also made interim restraining orders under section 32(2) of the Takeovers Act 1993 restraining Kerifresh from registering any transfers of shares in Kerifresh to or from Jonathan McHardy and Lawrence Fletcher.

    These restraining orders are due to expire at the close of 9 November 2007.The full details of the Panel's restraining orders are published on the Panel's website.

16. Summonses were issued to Alan Thompson, Harold and Helen Wern Thompson, Hamish McHardy, Maureen Patterson (an employee of Kerifresh), Robert Wood and David Morrison (solicitor and partner, respectively, of Grove Darlow), GDP Trustee Company Limited and Kerifresh Limited. Jonathan McHardy, who lives in New York, and Lawrence Fletcher, who lives in London, were both invited to give evidence for the purposes of the Panel's meeting by videolink.
17. The Panel arranged videoconferencing facilities in Auckland to facilitate participation by the overseas witnesses. Jonathan McHardy availed himself of the opportunity to use the videoconferencing facilities. Evidence was taken from him on the morning of the Panel's meeting. Unfortunately visual contact was lost during this process but evidence was given on affirmation and audio contact was maintained. The session was recorded and a transcript of evidence made.
18. Lawrence Fletcher did not participate in the meeting but provided a number of written statements through his lawyers, Grove Darlow² . He explained that because of a recent family bereavement and the short period of notice of the meeting he was not able to participate in the meeting. Subsequently Lawrence Fletcher provided a sworn declaration dated 6 November 2007 that had been signed in Oman.
19. The Panel acknowledges that Lawrence Fletcher had experienced a recent family bereavement. At the time of the hearing the Panel was advised that he was on a break with his family in Oman following the bereavement. While no adverse implication can be drawn from Lawrence Fletcher's non-participation in the Panel's meeting, nevertheless the consequences of his non-participation were made clear to Mr Fletcher by the Panel in its invitation to him to attend either in person or via a videoconference.
20. Under section 32(3) of the Act the Panel may make a determination that it is satisfied or that it is not satisfied that a person has complied with the Code. If, on the basis of the information available to it and having given the person the opportunity to be present and to respond to the information put to him, the Panel is not satisfied that a person has complied with the Code then the Panel can so determine. The election of a person not to appear before the Panel, even if via the facility of a videoconference, cannot preclude the Panel from making what it considers is the appropriate determination on the available evidence concerning that person.
21. After the notice of the 7 November 2007 meeting had been given, TGL formally requested, under section 31V(2) of the Act, that it be given leave to be heard and be represented at the Panel's 7 November 2007 meeting. The Panel decided, on Monday 5 November 2007, that TGL was a party who ought to be heard and whose appearance would be of assistance to the Panel. The Panel therefore granted leave to TGL to be heard and represented at the meeting.
22. Submissions and written statements of evidence were received from or on behalf of Hamish McHardy, Jonathan McHardy and Alan Thompson prior to the meeting. Documents sought under summons were provided to the Panel on Monday 5 November by Hamish McHardy, Jonathan McHardy, and Kerifresh. Further documents were provided by Hamish McHardy and Maureen Patterson on Tuesday 6 November 2007. Grove Darlow handed the Panel its Lawrence Fletcher and Hamish McHardy files at the start of the meeting on 7 November 2007. The Panel is appreciative of the efforts of those parties who made early provision of their documents. This facilitated the progress of the hearing, which ran from receiving video evidence from 8.30 a.m. to 10.30 a.m. and then a normal hearing from 11.00 a.m. to 6.30 p.m. on 7 November 2007.
23. Evidence relevant to the matters the subject of the meeting was received under oath or affirmation from, in sequence, Jonathan McHardy (by videolink), Harold Thompson, Anthony Gibbs, Hamish McHardy, Maureen Patterson, Alan Thompson, David Morrison and Robert Wood. Evidence was also given during the course of the meeting by Paddy Marra, independent director of Kerifresh. Legal submissions were received from, in sequence, legal advisers representing TGL, Kerifresh, Hamish and Jonathan McHardy, and Alan Thompson.

Application of the Code

24. In the analysis and reasoning which follow the elements of the Code that are of primary interest are rule 6, the fundamental rule, and rule 4, which defines "associates" for Code purposes.
25. Rule 6 of the Code is the "fundamental rule". It provides:

(1)   Except as provided in rule 7, a person who holds or controls- (a) no voting rights, or less than 20% of the voting rights, in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company unless, after that event, that person and that person's associates hold or control in total not more than 20% of the voting rights in the code company:

(b)   20% or more of the voting rights in a code company may not become the holder or controller of an increased percentage of the voting rights in the code company.

(2)   For the purposes of subclause (1), if-

(a) a person and any other person or persons acting jointly or in concert together become the holders or controllers of voting rights, that person is deemed to have become the holder or controller of those voting rights:

(b)   a person or persons together hold or control voting rights and another person joins that person or all or any of those persons in the holding or controlling of those voting rights as associates, the other person is deemed to have become the holder or controller of those voting rights:

(c)   voting rights are held or controlled by a person together with associates, any increase in the extent to which that person shares in the holding or controlling of those voting rights with associates is deemed to be an increase in the percentage of the voting rights held or controlled by that person.

26. Rule 4 defines "associate" for the purposes of the Code:

(1) For the purposes of this code, a person is an associate of another person if-

(a) the persons are acting jointly or in concert; or

(b) the first person acts, or is accustomed to act, in accordance with the wishes of the other person; or

(c) the persons are related companies; or

(d) the persons have a business relationship, personal relationship, or an ownership relationship such that they should, under the circumstances, be regarded as associates; or

(e) the first person is an associate of a third person who is an associate of the other person (in both cases under any of paragraphs (a) to (d)) and the nature of the relationships between the first person, the third person, and the other person (or any of them) is such that, under the circumstances, the first person should be regarded as an associate of the other person.

(2) A director of a company or other body corporate is not an associate of that company or body corporate merely because he or she is a director of that company or body corporate.

Matters for determination by the Panel

(1)   Whether Jonathan McHardy and Hamish McHardy, whom the Panel has already determined at a meeting of the Panel on 16 October 2007 were, for the purposes of the Code, associates of each other in terms of rule 4 of the Code, were also associates under that rule of Alan Thompson at the time that Hamish McHardy and Jonathan McHardy, as trustees of the Murrayfield Trust, acquired 597,316 shares in Kerifresh on or about 29 May 2002 from Peter and Linda Hendl such that the aggregate of the shareholdings of Jonathan McHardy and Hamish McHardy (singly and jointly) and Alan Thompson was in excess of 20% of the voting rights in Kerifresh after the 29 May 2002 acquisition of shares and therefore that that acquisition of 597,316 Kerifresh shares was made otherwise than in compliance with rule 6 of the Code.

27. Peter Hendl, co-founder of Kerifresh with Alan Thompson, and Linda Hendl jointly held 1,266,516 shares, or 17.84% of total voting rights, in Kerifresh in May 2002.
28. On or about 29 May 2002, after a period of negotiation, Hamish McHardy acquired 669,200 shares in Kerifresh from the Hendls. In addition Jonathan McHardy and Hamish McHardy, as trustees of the Murrayfield Trust, acquired the balance of the Hendl's holding, being 597,316 Kerifresh shares. The trustees of the Murrayfield Trust already held 20,000 Kerifresh shares for the Trust. The combined holdings of the McHardys, father and son, in their personal and trustee capacities, was 18.12% of the total voting rights in Kerifresh following these acquisitions in May 2002.
29. Jonathan McHardy is an investment banker who was living in London at the time of these transactions and is now resident in New York. He is a senior executive with the international firm of Credit Suisse First Boston.
30. For the purposes of the first Panel meeting the Panel was provided by TGL with a copy of an unsigned document purporting to be an agreement between Alan Thompson and Hamish McHardy ("the Draft Agreement"). Alan Thompson is Chief Executive Officer of Kerifresh.
31. The text of the Draft Agreement is as follows:

PURCHASE OF KERIFRESH SHARES

This agreement is between Alan Thompson (Trust name)("Thompson") and Hamish McHardy (trust name)("McHardy")

The parties agree

1. Thompson on 29 May 2002 will lend $255,000 to McHardy so as to allow McHardy to buy 375,000 in Kerifresh Ltd. ("The Thompson Loan")
2. The Thompson Loan is at 0% interest and of no fixed term.
3. Thompson has the right to recall the loan at any time on the terms agreed below.
4. McHardy agrees to Thompson having the right to recall the loan at any time on the basis that repayment shall be in the form of the transfer to Thompson of the 375,000 shares originally purchased by McHardy or such other shares that McHardy may acquire but in either case the value of the transfer will be 375,000 shares at 68c each.
5. Thompson is entitled to any income arising from the 375,000 shares originally purchased by McHardy. In the event this is cash as in a dividend the Thompson will raise a GST invoice for interest equal to the cash dividend. In the event that cash is a principal or capital repayment then this amount shall be applied to reducing the principal amount of the Thompson Loan. If there is any share split or bonus shares then the number of shares to be transferred to Thompson will be adjusted accordingly, as if Thompson had held the shares himself.
6. Hardy agrees to maintain at least 375,000 shares in Kerifresh, or the equivalent if split or bonus shares issued and not allow any security interests to be registered against these shares.

Agreed this day

Footnotes

1. The requirement for code companies to have $20 million of assets was removed by the Takeovers Amendment Act 2006. The 2002 transactions under consideration at the Panel's meeting took place prior to the change of definition but the Fletcher offer was made under current law.
2. Although Grove Darlow act as legal advisers for Lawrence Fletcher in relation to the offer for Kerifresh shares the firm did not appear for him, nor make submissions on his behalf, at the Panel's meeting. Members of the firm, Messrs Wood and Morrison, attended as witnesses summonsed to give evidence in relation to their own conduct.

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