CODEWORD

Rule 6(2) has provisions designed to ensure that the fundamental rule is not defeated by the manner in which company shareholdings are structured.

Designer Textiles (N.Z.) Limited (DTL) is a Code company. Its major shareholder is Gould Holdings Limited (GHL), an investment company controlled by Mr George Gould, with a 24.69% stake.

Mr Gould has had a long association with the Rutherford family. In the latter part of 2002 the members of the Rutherford family sold their investment company, Amuri Securities Limited (ASL) to GHL in exchange for shares and convertible notes in GHL.

After Mr Gould had subscribed some additional capital in GHL the Rutherford family held 21.24% of GHL while Mr Gould, through a separate company Gould Investments Limited (GIL), held 78.76%.

The Panel was concerned that the Rutherford family interests may have joined Mr Gould in “holding or controlling” GHL’s 24.69% stake in DTL in breach of the Code. The issue was the effect of rule 6(2)(b) which states that if:

(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:

To come within rule 6(2)(b) the Rutherfords first had to have joined Mr Gould/GIL in the control of GHL and therefore the control of GHL’s shareholding in DTL.

The Panel examined the relationship between the Rutherford family and Mr Gould to decide whether the Rutherfords may have joined Mr Gould/GIL in controlling GHL. Of particular note to the Panel were:

• the Rutherfords had no board representation on GHL;
• the Rutherfords acquired their interest in GHL accepting that they had no right to influence Mr Gould’s control of that company; and
• there was no shareholder agreement to provide the Rutherfords with any control in the decision-making process of GHL.

The Panel accepted that the Rutherford family had not joined Mr Gould/GIL in the controlling of GHL’s 24.69% holding in DTL. The Panel noted that it would be unusual for an investment of 21.24% to be made in a closely-held company on an entirely “sleeping partner” basis with no checks and balances on the conduct of that company. However, in this case the evidence indicated that

• Mr Gould was intent on retaining control of GHL; and
• the Rutherford family bought their shares in GHL accepting that they had no rights to influence GHL’s governance, either in controlling the votes in DTL, or otherwise.

The second part of rule 6(2)(b) requires that parties are joined in the holding or controlling of the voting rights as associates. As the Panel determined the requirements of the first part of rule 6(2)(b) had not been met, there was no need to consider whether the Rutherfords and Mr Gould/GIL were associates.