Further matters for determination

(2)   Whether Lawrence Fletcher, who made an offer for 335,000 Kerifresh shares on 18 October 2007 at $2 per share, which was contained in a letter to individual Kerifresh shareholders from Grove Darlow & Partners, Auckland dated 18 October 2007, was at the time of making the offer, and remains, an associate for Code purposes of Jonathan McHardy and of Hamish McHardy and/or of Alan Thompson, who between them hold in excess of 20% of the voting rights in Kerifresh such that any acquisitions of Kerifresh shares by Lawrence Fletcher would not comply with rule 6 of the Code and therefore that Lawrence Fletcher was not complying with and did not intend to comply with the Code by circulating the offer;

(3)   Whether Alan Thompson, Hamish McHardy and Jonathan McHardy were, directly or indirectly, knowingly concerned in, or a party to, the intended acquisition of shares in Kerifresh by Lawrence Fletcher

74. On 18 October 2007 Grove Darlow circulated a letter to all Kerifresh shareholders
    ("the Lawrence offer letter") in the following terms:

KERIFRESH LIMITED

We hold 10,000 Kerifresh shares in our nominee company on behalf of Lawrence Bruce Fletcher, a resident of the United Kingdom.

Mr Fletcher desires to increase his shareholding by up to 335,000 shares and is prepared to purchase that number of shares at $2 per share with no conditions attached. If you are interested in offering to sell all or part of your shares to Mr Fletcher please complete and sign the share transfer enclosed and return to us as soon as possible.

We are holding funds to pay for the shares being sought and undertake to hold the share transfer on your behalf until such time as we have sent payment in full to you. The share offers will be accepted on a "first come basis". Share offers received after the 335,000 limit has been met will not be accepted and the share transfer form will be returned to the shareholder concerned.

Like you, Mr Fletcher has received the letter from Turners and Growers Limited advising that it intends to make an offer for all the shares in Kerifresh and that offer is conditional on acceptances from holders of at least 50% of the shares. Our client's understanding is that this threshold may not be achieved. On the other hand his offer is unconditional.

75. The legal advisers to TGL, Russell McVeagh, Auckland, copied the Panel in on a letter of 19 October 2007 from TGL to Grove Darlow in which TGL sought explanations of a number of aspects of the Lawrence offer letter. Among other things TGL said that in its opinion Jonathan McHardy was an associate of Alan Thompson and of Hamish McHardy (whom it regarded as Grove Darlow's client). TGL drew attention to the initials "MCH" being included in the Grove Darlow file reference on the Lawrence offer letter.
76. The Panel considered that, given the existing level of Kerifresh shareholdings of the McHardys and of the Thompsons, and given that the Panel had determined on 18 October 2007 that Hamish McHardy and the Thompsons were associates of each other for the purposes of the Code, at least between 2002 and 2005, such relationships could mean that any acquisitions of Kerifresh shares by Lawrence Fletcher would not comply with rule 6 of the Code.

The personal and business relationship between Jonathan McHardy, Hamish McHardy and Lawrence Fletcher

77. Grove Darlow replied to Russell McVeagh on 25 October 2007. Its letter was copied to the Panel on the same day. That letter included, among other comments:

No one is denying that Lawrence knows Hamish, mainly through Hamish's son Jonathan. However the association is not a close one. Lawrence lives in London but wants to invest in New Zealand. Hamish as a New Zealand resident business man was able to initiate business contacts in New Zealand for Lawrence.

While Hamish initially referred Lawrence to Grove Darlow & Partners, we have been instructed by Lawrence subsequently.

The writer [Rob Wood] enquired into the question of control and association that may arise in the case of Lawrence seeking to acquire shares in Kerifresh.

Our advice was that Lawrence sought information from Hamish regarding investment in New Zealand but made his own assessment of that information and any investment suggested.

Lawrence advises that there has been little ongoing contact between Hamish and Lawrence subsequent to the initial referral about the advisability of buying shares in, or the business of Kerifresh itself.

...

Lawrence intends to act on his investment in Kerifresh as an independent person and will not be handing any form of "control" to anyone else.

Further, Lawrence denies that there is any "acting in concert" with Hamish or other people with regard the acquisition of shares.

...

Your reference to Grove Darlow & Partners document indexing is similarly speculative. Initially the referral [to Grove Darlow] was from Hamish (whom incidentally we have not acted for in the past) who simply made the first approach, but subsequent dealings were with Lawrence. The file having been opened in one name remained in that name. ...

78. In his written submissions to the 7 November 2007 meeting Hamish McHardy said, of the Lawrence Fletcher relationship:

I have met Mr Fletcher only once in London and consider I am not associated with him. I have had one investment with him in a private company called Neverland Investments in which he was a fellow shareholder. I was also aware that at the conclusion of this investment Mr Fletcher had left funds in New Zealand via a loan to my son Jonathan which was in turn on-lent to the Murrayfield Trust.

From my son Jonathan I became aware of Mr Fletcher's interest in acquiring shares in Kerifresh and I asked Kerifresh management to send to Grove Darlow, Mr Fletcher's lawyers, a copy of the Kerifresh share tender documents. Grove Darlow subsequently wrote to Kerifresh expressing interest on behalf of Mr Fletcher in acquiring shares.

A parcel of 10,000 shares for sale was identified and Grove Darlow made the purchase on Mr Fletcher's behalf in early August. I originally paid the $15,000 to Grove Darlow for the settlement of the shares and was promptly reimbursed by Mr Fletcher.

My actions in encouraging Mr Fletcher's investment were entirely in accordance with my chairmanship of Kerifresh where I have a continuing interest in encouraging investors to invest in the company. This role extended to discussions in relation to Mr Fletcher's desire and attempt to acquire further shares after Turners and Growers gave notice of its intention to make a takeover bid.

79. In his written submissions to the Panel for the 7 November 2007 meeting Jonathan McHardy made a number of comments about his relationship with Lawrence Fletcher, including:

Larry is a UK national and a colleague of mine at Credit Suisse.

My investment history with him involves just two transactions.

The first was in relation to a private New Zealand company, Neverland Investments Limited. In July 2004, the Trust purchased 20% of the equity in Neverland which owned a block of land in Ngunguru, Northland.

Hamish had a 14.3% shareholding in this company, Larry Fletcher 10%, with the balance of the equity held by 6 other separate non-connected individuals. The total equity of the company was approximately $3.5 million

In September 2006, this company was sold in its entirety by the nine shareholders for approximately $10 million and the proceeds, after repayment obligations were met, were distributed to shareholders in September and October 2006.

The second transaction was a loan from Larry to me.

In September and October 2006, Larry received an amount of $611,967.93 from the sale of his interest in Neverland, which he decided he wanted to keep in New Zealand dollars and to potentially reinvest in a suitable property or other enterprise.

I offered to borrow the money from him at the prevailing interest rates on the basis I would repay it on demand. I in turn on-lent the money to the Trust which utilised it for its general purposes.

This money with interest was repaid by me (via the Trust) to Larry in three instalments as per his requests:

On 6 August 2007, $15,000

10 October 2007, $330,000

on or about 24 October 2007, $330,000 ...

The interest rate for the loan was set at 7.5% for the period through to 11 June 2007 and thereafter 8.25%.

80. In relation to the Neverland Investments Limited ("Neverland") property syndicate the Panel was told by Jonathan McHardy, in his oral evidence, that the Murrayfield Trust was in the business of investing in property and a friend had become aware of a block of land in Northland that was available for purchase. He said that Lawrence Fletcher was keen to invest in New Zealand.
81. Jonathan McHardy acknowledged that he had introduced Lawrence Fletcher to the Neverland investment. He could not recollect whether he had also introduced his father, Hamish McHardy, to the property. Jonathan McHardy said that Hamish McHardy was originally not going to invest but in the end he did. Jonathan McHardy acknowledged that he had been communicating with his father about the investment in Neverland before they had individually decided to invest.
82. Jonathan McHardy gave evidence to the effect that apart from himself and Lawrence Fletcher, four other syndicate members were either current or former employees of Credit Suisse First Boston. Other members of the syndicate were employed by major banks. Basically this was a syndicate of friends who had decided to invest in a New Zealand property. The Panel was told that all members of the syndicate other than Lawrence Fletcher were New Zealanders.
83. Hamish McHardy, in his oral evidence, said that he had been the sole trustee and sole director⁶ of Neverland and as such had dealt extensively with Grove Darlow, who were the lawyers for that investment syndicate.
84. Lawrence Fletcher, in his sworn statement to the Panel, did not comment on his investment in Neverland. However, he did note that he has several friends in New Zealand whom he consults from time to time over investment opportunities. One of these friends is Jonathan McHardy.
85. In summary, the evidence given at the Panel's 7 November 2007 meeting and the documents produced for the meeting indicate the following:
    1. Jonathan McHardy and Lawrence Fletcher are friends and work colleagues but not necessarily close friends. Lawrence Fletcher acknowledges that he has taken advice on investments in New Zealand from time to time from, among others, Jonathan McHardy;
    2. Hamish McHardy, Jonathan McHardy and Lawrence Fletcher were three members of a nine member property syndicate which purchased and later sold property in Northland;
    3. In oral evidence and written submissions it was said that Lawrence Fletcher lent Jonathan McHardy $611,967.93, being the proceeds of Lawrence Fletcher's investment in their property syndicate. The loan was on an unsecured basis, with details covered by a limited number of email exchanges between them. The email evidence shows that this money was actually lent directly to the Murrayfield Trust;
       
       In an email message of 19 September 2006 from Jonathan McHardy to Hamish McHardy and Lawrence Fletcher, copied to Roger Peter Sinclair ("Roger Sinclair") (the third trustee of the Murrayfield Trust) Jonathan McHardy wrote:

Larry    Re the suggested advance of your share of the funds received to Murrayfield Trust (Hamish, Roger and I are trustees). Assuming you still want to proceed I suggest you confirm to Hamish (who can forward to the lawyers who may want you to sign something) that these funds are to be paid to Murrayfield Trusts [bank account]. For now propose Murrayfield Trust pays you 7.75% which is a little above the current cash rate (7.25%) down there and we agree the Murrayfield Trust will repay these funds when you require ie on demand.

This arrangement was advantageous to Jonathan because it helped the Murrayfield Trust reduce an overdraft. It was helpful to Lawrence who wanted to retain a New Zealand dollar exposure. Jonathan McHardy regarded the informal basis on which the loan was made as being not unusual.

In the Panel's view these loan arrangements are evidence of a substantial degree of trust and reliance by Lawrence Fletcher and Jonathan McHardy on the word of each other;

4. As already noted, Hamish and Jonathan McHardy are father and son and undertake a number of investments in common, including in relation to Kerifresh. Prior to consideration of their relationship for the purposes of the Lawrence Fletcher offer, Hamish and Jonathan McHardy have been found by the Panel to be associates for the purposes of the Code;
5. Lawrence Fletcher made no comment about his involvement in Neverland in his sworn statement of evidence.

The decision to acquire shares in Kerifresh and the initial purchase of 10,000 shares

86. Jonathan McHardy, in his written statement of evidence for the 7 November 2007 meeting, said:

Sometime earlier this year, I mentioned to Larry that, in my opinion, Kerifresh was an attractive if highly illiquid property/horticulture play. This view was based on Kerifresh's NTA of $3.50 as against a share price of around $1.50, the company's ownership of valuable lifestyle land and the rising demand for agricultural products globally.

These positive factors were reinforced by Kerifresh having an improved first half result, and more recently by the increased activity in the company's equity (i.e. Terrance O'Connor [sic] and the recent T & G actions and inactions).

I am aware Larry first purchased 10,000 shares in August 2007. I am also aware of his desire to purchase further shares in the company, through him asking for his loan to me to be repaid on the above dates, his written offer to shareholders and his conversation with me on the investment and recent events.

87. Lawrence Fletcher, in his sworn statement of 6 November 2007, responding to the Panel's invitation that he attend the Panel's meeting on 7 November 2007, said:

In the course of my work I have occasion to work with several people from New Zealand who have become friends over time.

Because I am interested in investing some money in New Zealand I have turned to them on several occasions for advice on investment opportunities to be found in New Zealand.

One friend based in London is Jonathan McHardy who recommended to me the purchase of shares in Kerifresh as he believed they were selling at an undervalued level at the time around $1.50.

I carried out my own investigations and satisfied myself after some inquiry that at $2.00 shares in Kerifresh were undervalued and would be a good investment. On that basis and with the help of Jonathan McHardy and his father Hamish McHardy I signified my interest in purchasing the shares and sought guidance from them on the method by which I could achieve such a purchase.

Mr Hamish McHardy referred me to Grove Darlow, Solicitors, who undertook to act as my agent in New Zealand for the purchase of the shares.

I have already purchased 10,000 shares in Kerifresh in August and while I have invited existing shareholders to offer me their shares for sale I have not purchased further shares at this point of time.

88. Hamish McHardy's written evidence on this point is set out at paragraph 78 above.
89. Initial contact with Grove Darlow was made by Hamish McHardy in June 2007. A letter dated 19 June 2007 from Grove Darlow to Kerifresh Limited, written in response to that contact, included:

We have a client which is interested in purchasing shares in Kerifresh Limited. Could you kindly forward the last annual report and confirm the number of shares which are currently available for purchase. Subject to approval of the annual report our client intends to make an offer to purchase some or all of the shares. Could you please let us know the current share sale price.

90. Maureen Patterson, an employee of Kerifresh responsible for processing share transfers, passed this message on the same day in an email message to Alan Thompson and Phil Wallis of Kerifresh. Alan Thompson is the Chief Executive Officer of Kerifresh, while Mr Wallis is the finance director.
91. On 25 June 2007 Alan Thompson replied to David Morrison, partner of Grove Darlow, and gave some general information about the company's share tender process. Within an hour David Morrison had passed this message from Alan Thompson on to Hamish McHardy. Hamish McHardy is the Chairman of Kerifresh.
92. A purchase of 10,000 Kerifresh shares was made from the executors of an estate in Blenheim. Solicitors acting for the vendors provided the Panel with various letters and file notes concerning the vendors' transaction. Other information came from the files of Grove Darlow and in the form of oral evidence. That material included:
    1. On 13 July 2007 solicitors in Blenheim acting for a deceased estate advised Kerifresh that the executors of the estate wished to offer their shares into the annual tender⁷ .
    2. On 16 July 2007 a file note prepared by one of the secretarial staff of the Blenheim solicitors recorded that Alan Thompson had phoned regarding Kerifresh shares. He said he had phoned to suggest that the offer into the tender be withdrawn because:

... he was sure a higher price could be achieved. He said he was aware of other buyers around and he would put Alan [Blenheim solicitor] in contact with them.

3. One of those other buyers was Terry O'Connor, a former Chairman of Kerifresh and, as it transpired, acting for TGL, who had circulated a letter of offer to selected Kerifresh shareholders on 9 July 2007, repeated on 23 July 2007, offering $1.50 per share for their Kerifresh shares. Another possible buyer would have been Grove Darlow's unnamed client in its letter of 19 June 2007 to Kerifresh (see paragraph 89 above).
4. The Blenheim solicitors followed Alan Thompson's advice to withdraw their shares from the tender. A letter of 31 July 2007 from the Blenheim solicitors to Kerifresh, marked for the attention of "Hamish McHardy", indicated that the Estate wished to sell 10,000 shares. There is a note on the letter indicating that Hamish McHardy had been telephoned on 1 August 2007 to say that the letter was on its way.
5. There was also a note from the file of the Blenheim solicitors on an A4 piece of paper dated 31 July 2007 with the words "Alan Thompson", the figure "$1.50". and a telephone number with the words "Hamish McHardy" written alongside the telephone number. When asked in evidence if the telephone number had any connection with him, Hamish McHardy said "No, I don't know anything." When prompted by his lawyer that the number was in fact his (Hamish's) telephone number, Hamish McHardy said "Oh yeah that's mine." Hamish McHardy then confirmed that it was his number although with one numeral missing.
6. A letter of 17 August 2007 from Grove Darlow to the Blenheim solicitors which stated:

We act for Hamish McHardy and interests associated with Mr McHardy. We advise that our trust account cheque for $15,000, together with a completed share transfer form was sent to Kerifresh Limited on 8 August 2007, attention Mr Phil Wallis.

In oral evidence given at the 7 November 2007 meeting, David Morrison of Grove Darlow said that the reference to acting for Hamish McHardy had been "an unfortunate use of wording from a conveyancing lawyer in this context." The file had been opened in Hamish McHardy's name and the business remained in that file until 1 November 2007, when a Fletcher file was opened. The Panel was told that the total billing on the McHardy and Fletcher files had been made to Lawrence Fletcher.

David Morrison confirmed in evidence that it was not until early August 2007 that they knew that the firm's client was Lawrence Fletcher.A handwritten letter on Grove Darlow's file, dated 6 August 2007, from Hamish McHardy to David Morrison, said:

David

Please bank this cheque for $15,000 and draw another for the same on your nominee a/c and sign the transfer and post to Kerifresh in the postage included envelope provided.

Lawrence Fletcher may contact you as his nominee!

Yours
Hamish McHardy

Subsequent email correspondence shows that Grove Darlow was closely involved in communications with Hamish McHardy and Jonathan McHardy right up until the time Lawrence Fletcher's offer was sent to shareholders on 18 October 2007.

7. In evidence Hamish McHardy acknowledged that he had paid $15,000 to Grove Darlow to settle the purchase of the 10,000 Kerifresh shares, and had been repaid the next day from funds released by Jonathan McHardy to Lawrence Fletcher in part repayment of the loan by Fletcher to the Murrayfield Trust. As stated in his written evidence (see paragraph 78 above) Hamish McHardy said that the reason he paid for the shares was because of his chairmanship of the company and his responsibility to encourage investment in the company. When questioned by Panel members at the hearing as to why he had settled for the 10,000 shares purchased by Grove Darlow for Lawrence Fletcher and been reimbursed the next day, he said:

Can't remember. But I - it seems a funny thing to have done, doesn't it. For me to pay $15,000 for Fletcher and then being reimbursed the next day or the day after. I asked myself the same question just the other day - I thought why did I do that? It may be the payment was due immediately and Fletchers had difficulty in getting the money back or something - I can't remember exactly.

8. There are three separate strings of emails relating to this initial purchase of 10,000 Kerifresh shares, following the initial message of 5 August 2007 from Hamish McHardy, excerpts of which are set out below.

1. In the initial message of 5 August 2007 at 18:46 from Hamish McHardy to Jonathan McHardy and Lawrence Fletcher, copied to David Morrison, Hamish McHardy said:

I have paid NZ$ 15,000 to Grove Darlow solicitors, for 10,000 Kerifresh shares to be held for Lawrence Fletcher. Please reimburse me at [account number] David's details are below.

2. In a reply of 6 August 2007 at 10.31 a.m. from Lawrence Fletcher to David Morrison, Lawrence asks:

Are you ok to hold these shares for me through your nominee company. Hamish said this may be possible. Please let me know if I have to complete any forms to enable you to do this and what any fees might be. Thanks and regards, Larry

3. David Morrison replied on 8 August 2007 at 10.29 a.m. He said:

Gidday Lawrence. No problem holding shares on trust for you. I will draft up a bare trust document. ...

4. In a reply of 6 August 2007 at 3.06 a.m. to Hamish's message set out in paragraph (A) above, Jonathan McHardy said:

That account is yours right ie P H McHardy?"

5. In his reply of 5 August 2007 at 16.34 Hamish McHardy said:

Yes that's right.

6. Jonathan McHardy, in a message on 6 August 2007 at 10.33 a.m. in reply to Hamish McHardy's message requesting reimbursement (see paragraph (A) above) said:

Ok will be paid today.

7. Lawrence Fletcher, in his reply to Hamish McHardy's message of 5 August 2007 which he also sent to Jonathan McHardy (see paragraph (A) above) said:

Thanks Hamish. Jonathan let me know if I need to do anything. Kind regards, Larry.

8. Jonathan McHardy, in a message on 6 August 2007 at 1.50 a.m., to Lawrence Fletcher and Hamish McHardy, said:

I will effect payment from funds owed to you so no need to do anything.

9. On 8 August 2007 at 9.16 a.m. Hamish McHardy sent an email to David Morrison, under the subject "Lawrence Fletcher", saying:

Hopefully you will have my letter and cheque and will have filled in the registration form and sent to Kerifresh with your nominee cheque. Sorry to be a nuisance. Regards ..

This message was acknowledged by David Morrison at 10.23 a.m. the same day.

Footnotes

6. The reference to sole director was probably a correction of "sole trustee". However, Companies Office records show that Hamish McHardy was not the sole director of Neverland Investments Limited in 2004. There were two directors, the second of whom was Peter John Haworth, of St Heliers, Auckland. He was not a member of the investment syndicate.
7. Because Kerifresh is not listed on the New Zealand Exchange it runs an annual tender, soon after publication of its annual report, whereby the company would match up intending sellers of Kerifresh shares with interested buyers.

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