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Effects on the Securities Markets of certain statements made in May 2006 concerning telecommunications [2006] NZSecCom 3 (25 July 2006)
Last Updated: 11 November 2014
Effects on the Securities Markets of certain statements
made in May 2006 concerning telecommunications
25 July 2006
TABLE OF CONTENTS
EXECUTIVE SUMMARY
- The
Commission's purpose is to strengthen confidence in New Zealand's capital
markets, both in New Zealand and overseas, and to foster
capital investment in
New Zealand by promoting the efficiency, integrity and cost-effective regulation
of those markets. The Commission
considers that integrity and efficiency of the
markets are best served through a well informed market with a high standard of
disclosure,
and when investors have equal access to material information, so
that they can trade on the same information at the same time. Asymmetries
in
information in the markets can result in a deterioration of market integrity and
investor confidence.
- The
Commission has conducted an inquiry into the conduct and circumstances
surrounding the release of the Government's Telecommunications
Stocktake Paper
on 3 May 2006 ("the Stocktake paper"), and into comments reportedly made during
a media interview on 15 May 2006
by the Communications Minister, Mr David
Cunliffe, regarding the dividend policy of Telecom Corporation of New Zealand
Limited ("Telecom").
- The
Terms of Reference of the Commission's inquiry are set out in Appendix A. In its
inquiry the Commission considered whether:
- any
person misused any price-sensitive information relating to securities contained
in the Telecommunications Stocktake paper before
that information was publicly
available;
- any
Government and/or state sector policies and procedures for handling non-public
price-sensitive information relating to securities
were appropriate and properly
applied; and
- any
person could or should have taken, or refrained from taking, any actions in
respect of these matters to maintain the transparent
and orderly functioning of
the securities markets in New Zealand or elsewhere.
- With
regard to the events of 3 May 2006, the Commission has formed the following
views:
- there
was no evidence of any trading or encouragement to trade in securities by
persons who knew of the contents of the Stocktake
paper before it was made
public;
- it is
the Government's prerogative to announce changes to regulatory policy affecting
the businesses of issuers of securities. Similarly
it is for Parliament to
debate and enact (or decline to enact) legislation. Announcements of Government
policy can naturally affect
share prices. Accordingly, the fall in the Telecom
share price due to the announced change in Government policy, was not of itself
a cause for inquiry by the Commission;
- that
Telecom would receive an unauthorised copy of the paper was unforeseen by either
Telecom or the Government, and they each had
only a few hours to decide how best
to handle the situation. The actions of both Telecom and the Government were
understandable in
the unusual and difficult circumstances of the day. However,
an environment was created in which there was an avoidable asymmetry
in the
information in the market, for just under 30 minutes while trading was underway
on the Australian Stock Exchange ("the ASX").
Both the Government and Telecom
could have taken alternative steps to avoid the risk of asymmetry of information
in the market;
- there
are circumstances when it may be appropriate for an issuer to call a trading
halt to allow information to be distributed equally
to the market, even though
the issuer is not aware of the precise content of the information at the time
the halt is called. It would
have been appropriate for Telecom to have requested
a trading halt on the ASX in time for it to be in place when the Minister's
announcement
of the Stocktake Paper was made at 5.15 p.m. on 3 May;
- when
the Government or a regulatory agency is about to release non-public
price-sensitive information which can be expected to affect
the price of the
securities of a specific issuer during trading of those securities, it should
facilitate that information entering
the market in a way which allows trading
halts to be called if appropriate. It would have been appropriate for the
statement issued
by the Minister at his press conference, or at least the fact
that price-sensitive information was about to be released by the Government,
to
have been notified to Telecom and the New Zealand Stock Exchange ("NZX"). This
would have allowed the NZX and Telecom to determine
whether steps such as a
trading halt should have been taken, including on the ASX, to ensure that the
information was disseminated
to the markets and thereby enabling an orderly and
informed adjustment of the Telecom share price;
- the
Minister and officials acted consistently with the law and with the current
Cabinet guidelines for dealing with information relating
to publicly listed
companies. However the applicable Cabinet guidelines do not provide detailed
guidance about announcing regulatory
policy that might affect the price of
specific listed securities;
- the
Commission recommends that the Government engage with the NZX with a view to
developing procedures and guidelines for disclosure
by the Government of
information which could be price-sensitive to listed securities, while
accommodating the Government's other
legitimate concerns. The Commission refers
this report to the Prime Minister, as the person responsible for making
decisions regarding
Cabinet guidance for Ministers, to consider whether the
Government wishes to take any action in this regard.
- With
regard to the Minister's comments to Bloomberg on 15 May 2006 the Commission has
formed the following views:
- the
Minister is entitled to make comments to agencies that serve only a section of
the market if the comments made are not based on
any confidential or
price-sensitive information. This is the case whether or not the Minister has
confidential information, so long
as this is not the basis of the comments;
- the
comments made by the Minister on 15 May 2006 in the course of his interview with
Bloomberg were not based on any confidential
or price-sensitive information
about Telecom's intentions or policies, nor did the Bloomberg reports of 16 May
2006 give the impression
that they were so based;
- it
appears that some market participants assumed or guessed that the Minister did
have confidential information that would affect
Telecom's dividend policy and
traded on the basis of this. Trading of this nature occurs and does not of
itself mean that the market
has been improperly or unequally
informed;
- the
Commission reminds market participants that reported comments may not be a
complete or accurate reflection of what was actually
said;
- as a
general point, the Commission recommends that all persons, including Ministers
of the Crown, who may be presumed by the market
to be in possession of
non-public information about a listed issuer, exercise caution when commenting
on matters that might affect
the price of listed securities. Comments,
especially if they are verbal, can be misinterpreted or quoted out of context,
and disclaimers
and qualifying statements may be overlooked or under-emphasised.
PART I - INTRODUCTION
- On
12 May 2006 the Securities Commission announced an inquiry into the conduct and
circumstances surrounding the release of the Stocktake
paper on 3 May 2006.
- On
18 May 2006, after receiving a referral from NZX under the Securities Markets
Act 1988, the Commission announced that it had broadened
its inquiry to include
comments reportedly made during a media interview on 15 May 2006 by the
Communications Minister, Mr David
Cunliffe, regarding the dividend policy of
Telecom.
- This
is the Commission's report on its inquiry into these
matters.
The Commission's inquiry
- The
NZSX Market is New Zealand's principal market for equity securities. It features
the securities of the majority of New Zealand's
listed companies and a number of
overseas companies. There are currently 179 companies listed on the NZSX with a
combined market
capitalisation of approximately NZ$67 billion. Telecom is the
largest telecommunications company in New Zealand and the largest company
listed
on the NZSX board. On 3 May 2006 Telecom's market capitalisation was
approximately NZ$10.9 billion1 . It is
the only company on the NZSX board to have stock exchange listings in New
Zealand, Australia and New York. Telecom informs
us that as at 30 June 2006,
Telecom's shareholders were approximately 26.7% NZ resident, 25.4% Australian
resident, and 47.9% resident
in other overseas jurisdictions. As a result, any
event having a significant impact on Telecom is likely to provoke a high level
of comment and reaction amongst investors both in New Zealand and
internationally.
- On
3 May 2006 Telecom received from an unauthorised source a copy of a confidential
paper concerning the Government's Telecommunications
Stocktake and informed the
Government of this. This paper was a partially masked version of the Cabinet
paper that was considered
by Cabinet on 1 May 20062 ("masked paper"). The Government became aware
that the masked paper contained a near-final version of the Government's
regulatory
policy concerning telecommunications, the final form of which was
approved on the morning of 3 May 2006. The market had been aware
for some time
that the Government was conducting a review of telecommunications policy, but it
was not aware at this time of the
outcome of that review.
- Throughout
the afternoon of 3 May 2006, Telecom executives endeavoured to obtain
confirmation from officials of the authenticity and
status of the document they
had, and to determine their disclosure obligations. At the same time the
Minister of Communications and
officials were endeavouring to decide how best to
deal with the situation. The circumstances for both parties were unusual and
difficult,
and both had a great deal to consider within a short time.
- The
events of the day concluded with the Minister releasing the Stocktake paper
during a press conference late that afternoon after
the New Zealand markets had
closed. The Minister's announcement was followed by a sharp drop in Telecom's
share price. This occurred
immediately on the ASX which was still open at the
time of the announcement, and was reflected on the New York Stock Exchange (the
"NYSE") when it opened later that evening (NZ time) and the NZX the following
morning. It appeared that trading on both the NZX and
NYSE was orderly and
informed when these two markets opened.
- There
was immediate and considerable disquiet expressed through the media at the
manner and timing of the release of the information.
Concern was expressed by
various market commentators and participants, including the NZX, that the
markets had not been evenly informed
and that Australian investors had been
advantaged at the expense of New Zealanders. There was speculation about the
possibility of
improper conduct such as insider trading during this period.
- The
Commission has a function under the Securities Act 1978 to review practices
relating to securities and activities on the securities
markets, and to report
thereon to any appropriate body. The Commission's stated purpose is to
strengthen confidence in New Zealand's
capital markets (both domestically and
internationally) and to foster capital investment in New Zealand by promoting
the efficiency,
integrity and cost-effective regulation of New Zealand's
markets.
- It
appeared to the Commission that the events of 3 May 2006 had raised concerns
among investors and market participants that were
affecting confidence in New
Zealand's sharemarket. It appeared that this was particularly so given the
domestic and international
profile of Telecom stock relative to other New
Zealand listed companies and its significance to the capitalisation of the New
Zealand
sharemarket.
- The
Commission notes that some of the concerns expressed related to the drop in
Telecom's share price per se. It is the Government's
prerogative to announce
changes to regulatory policy affecting the businesses of issuers of securities.
Similarly, it is for Parliament
to debate and enact (or decline to enact)
legislation. Share prices will naturally rise or fall when price-sensitive
information
is released. Accordingly, the fall in the Telecom share price due to
the change in Government policy is not of itself a cause for
inquiry by the
Commission. Rather, the focus of the Commission's inquiry is on the manner and
timing of the release of the information
and whether these matters affected the
transparent and orderly functioning of the markets, and confidence in the
markets, by creating
information asymmetries or opportunities for misuse of the
information. As these matters caused widespread concern, and as they involve
practices relating to securities and activities on securities markets, the
Commission decided that it was necessary and appropriate
for it to inquire into
these matters.
- Markets
price securities most efficiently when they have the best available information.
This occurs when investors have equal access
to material information, so that
they can trade on the same information at the same time. Asymmetries in
information in the markets
can result in a deterioration of market integrity and
investor confidence. Accordingly, asymmetries in information should be avoided
whenever possible. To this end, most securities exchanges, in particular
exchanges belonging to the World Federation of Exchanges,
have rules requiring
the timely disclosure of material information to the market, with penalties for
failure to comply. Most exchanges
operate centralised facilities for
disseminating announcements to market participants and to the general public.
- The
NZX and the ASX have similar Listing Rules concerning the disclosure of material
information to the market. Where information
is material to the price of
securities, subject to certain exceptions an issuer is required:
- under
NZSX Listing Rule 10.1, to immediately release that information to the NZX;
- under
ASX Listing Rules, Chapter 3.1, to immediately tell the ASX that
information.
- The
Commission notes that although Telecom has securities quoted on the NYSE, the
Commission does not propose to outline the relevant
NYSE Rules in this report as
the NYSE market was closed when the information in question was released.
- Most
exchanges also provide mechanisms such as trading halts to help ensure that
participants will have equal opportunity to become
aware of, and evaluate,
price-sensitive information when it is disclosed. Trading halts operate as a
temporary cessation of trading
during which a potentially price-sensitive
announcement is made. Orders may be placed and withdrawn during the halt as the
information
is assimilated into the price of the securities, but cannot be
completed until the halt is lifted. The concept is that when the halt
is lifted
the market will have taken account of the price effect of the information and
trades will take place at that price, without
trading having occurred in the
intervening period on the basis of unequal information.
- Under
NZSX Listing Rule 5.4.1, an issuer can request a trading halt where it is
releasing or intends to release material information
to the market. NZX listed
issuers may request a trading halt of their quoted securities as a way of
managing the disclosure of material
information to the market.
- There
are two common types of trading halts. Where material information is released to
the market a brief trading halt, usually 10
to 15 minutes, can provide the
market with time to digest the information. This is intended to assist investors
to trade on an informed
basis. A trading halt may also be implemented whenever
an issuer intends to release material information, but is not able to make
an
immediate announcement under Listing Rules.
- The
ASX Listing Rules have analogous provisions in respect of trading halts. Under
the ASX Listing Rules, Chapter 17.1, an issuer
can request a trading halt of its
quoted securities.
- On
18 May the Commission broadened its inquiry to include comments made by the
Minister of Communications during a media interview
on 15 May 2006 regarding
Telecom's dividend policy. Telecom's share price dropped again following these
comments, and further concerns
were expressed that the Minister had disclosed
price-sensitive information through the media, and this had adversely affected
the
orderly dissemination of information to the market. This was the subject of
a specific reference to the Commission by NZX.
- The
Terms of Reference of the Commission's inquiry are set out in Appendix A. In its
inquiry the Commission considered whether:
- any
person misused any price-sensitive information relating to securities contained
in the Telecommunications Stocktake paper before
that information was publicly
available;
- any
Government and/or state sector policies and procedures for handling non-public
price-sensitive information relating to securities
were appropriate and properly
applied; and
- any
person could or should have taken, or refrained from taking, any actions in
respect of these matters to maintain the transparent
and orderly functioning of
the securities markets in New Zealand or elsewhere.
- In
terms of (a) above, the Commission inquired into whether any person may have
misused the price-sensitive information in the Stocktake
paper by trading in
securities of Telecom before that information became public or encouraging any
person to do so, whether this
would have constituted insider trading or tipping
under law or otherwise. That inquiry included all those persons who the
Commission
identified as having had access to the Stocktake paper prior to its
announcement, including relevant personnel of both Telecom and
the Government.
The Commission's inquiries have revealed no evidence to suggest that any such
trading or encouragement occurred.
- The
matters set out in (b) and (c) above concern events and actions on 3 May 2006 in
the context of the importance of disclosure of
price-sensitive information to
the integrity of and investor confidence in the securities markets. The matters
set out in (b) and
(c) above also concern events and actions surrounding the
comments attributed to the Minister of Communications in the Bloomberg
reports
of 16 May 2006 in the same context. These matters are discussed further in this
report.
- The
Commission's inquiry is concerned with the events that occurred after Telecom
had become aware of the nature and contents of the
masked paper that had come
into its possession. This is the point at which issues arose as to whether
disclosure to the markets of
the information in the masked paper was required.
The conduct of any party or any event which occurred before that time is
referred
to in this report only by way of background or where necessary to give
context to the Commission's comments. The genesis of the events
which
precipitated the Government's release of the Stocktake paper have been well
canvassed by both the media and in the State Services
Commission's 16 May 2006
report into the matter. A chronology of the key events which took place in the
critical period is set out
in Appendix B. Terms defined in the chronology are
used with the same meaning in the body of this report.
- This
inquiry has been carried out under section 10(b), 10(c) and 10(caa) of the
Securities Act 1978. These sections provide that it
is a function of the
Commission to:
10(b) keep under review the law relating to bodies
corporate, securities, and unincorporated issuers of securities, and to
recommend
to the Minister [of Commerce] any changes thereto that it considers
necessary
10(c) keep under review practices relating to
securities, and to comment thereon to any appropriate body
10(caa) keep under review activities on securities
markets, and to comment on those activities to the appropriate body
- The
Commission considers that the matters under inquiry raise issues of securities
markets practice upon which it is appropriate for
the Commission to comment. The
Commission has decided to comment by way of this report. The Commission does not
intend to recommend
any changes to the law as a result of its
inquiries.
Procedure
- The
Commission determined the procedures for this inquiry. A division of the
Commission was appointed to conduct this inquiry.
- In
the course of the inquiry the Commission obtained sworn evidence from the
following:
- Mr
Michael Ryan;
- Mr
Peter Garty, Group Financial Controller of Telecom;
- Ms
Linda Cox, Company Secretary of Telecom;
- Mr John
Goulter, Public Affairs and Government Relations Manager of Telecom;
- Mr Mark
Verbiest, Group General Counsel of Telecom;
- Mr
Geoff Brown, Products Group Manager of the New Zealand Exchange Limited;
- Mr
Geoff Dangerfield, Chief Executive Officer of the Ministry of Economic
Development;
- Mr
Maarten Wevers, Chief Executive Officer of the Department of the Prime Minister
and Cabinet;
- Ms
Diane Morcom, Secretary of the Cabinet;
- Ms
Heather Simpson, Chief of Staff to the Prime Minister;
- Mr Tim
Preston, Managing Director ASB Securities (by way of affidavit);
- Mr John
Whitehead, Chief Executive and Secretary to the Treasury (by way of
affidavit).
The Commission also received correspondence
from the NZX and ASX, and a copy of the State Services Commission's report into
the disclosure
of the paper to Telecom.
- Ministers
of the Crown cannot be compelled to give evidence in this inquiry. The
Commission requested that Mr Cunliffe appear and
give evidence at the same time
as other persons. The Minister of Communications provided a voluntary affidavit,
which was provided
after distribution of a confidential draft report and
transcripts of evidence.
- Having
received evidence from these people the Commission prepared a further
confidential consultation draft report and invited comment
from affected
parties. Relevant transcripts of evidence were also given to affected parties.
These parties were given the opportunity
to respond with submissions and to
provide further evidence.
- Where
an inquiry raises questions about the personal actions and intentions of
affected persons it is important for the integrity
of the inquiry process that
every person with a material interest is afforded the opportunity to appear at a
meeting of the Commission.
Such an opportunity was given in this case.
Confidentiality and privacy orders were in place throughout the inquiry. All
witnesses
were provided with the opportunity of being represented. Oral evidence
was recorded and relevant transcripts were made available
to witnesses.
- The
Commission has carefully considered all the evidence and submissions before it
before publishing this report.
Footnotes
- Following
the release of the Stocktake paper, Telecom's market capitalisation on 4 May
2006 was approximately NZ$9.9 billion.
- Telecom
received a partially masked version of the Cabinet paper. The paper was masked
by Mr Peter Garty, who removed the identifier
numbering on the front cover page
of the document. The paper received by Mr Garty and passed by him to Telecom
included a cover letter
from the Minister of Communications to the Prime
Minister dated 27 April 2006.
PART II - THE EVENTS OF 3 MAY
2006
Effect on the market
- Market
data for the trading of Telecom securities in the relevant markets between 3 and
4 May 2006 is set out in Appendix C.
- At
4.26 p.m. the Minister's office issued a media advisory announcing the
Minister's 5.15 p.m. press conference. This was sent to
journalists and posted
on the Beehive website3. It was not sent to Telecom, NZX or ASX.
There were no apparent irregularities in the trading activity of Telecom
securities prior
to 4.30 p.m. on 3 May 2006. After 4.30 p.m. there was an
increase in trading volume through to the close of the market at 5.00 p.m.
compared with the rest of that day's trading activity. However, there does not
appear to have been any material price effect. The
media advisory was picked up
by Reuters and Bloomberg. However, as it was not advised to the NZX it is
possible not all market participants
picked up the news that the Government was
planning an announcement.
- The
main impact on the markets occurred on the ASX after the Minister's announcement
at 5.15 p.m. and before trading was halted at
Telecom's request at approximately
5.42 p.m. (NZ time). On the ASX, the share price just prior to the media
advisory (2.26 p.m. Sydney
time) was A$4.68. For the trading period from 2.26
p.m. through to the Minister's announcement at 3.15 p.m. (Sydney time), the
share
price dropped to A$4.64 on volume of 364,099 shares. By the time Telecom
called a trading halt at 3.42 p.m., a further 1,767,622
shares had traded and
the share price had dropped to A$4.43. On the ASX that day 3,043,372 shares were
traded.
- The
information in the Stocktake paper was likely to have caused a decline in
Telecom's share price regardless of when or how it was
announced. However, the
Commission has considered whether the manner and timing of the announcement may
have resulted in trading
on the ASX on the basis of information that was not
equally available to all market participants and investors, and whether anything
could or should have been done to prevent that occurring, and whether the media
advisory may have created an opportunity for trading
by those who saw the
advisory or coverage of it.
Findings of the
Inquiry
Telecom
- Once
Telecom became aware of the masked paper, it decided that the proper course of
action was to seek confirmation of the authenticity
and status of the document
from the Government. Telecom sought legal advice both internally and externally.
The advice was that Telecom
might have continuous disclosure obligations but to
avoid misleading the market should not make disclosure without first having the
masked paper authenticated by the Government. In this regard, the Commission
notes that the copy received by Telecom had a masked
front page, and was of the
paper that was submitted to Cabinet, and then to the Cabinet Policy Committee
which on 3 May 2006 approved
the policy with certain changes.
- Telecom
executives attempted to contact the Minister, the Prime Minister and various
officials several times by telephone during the
afternoon. Details of the
various telephone calls and conversations are set out in the chronology at
Appendix B. Some conversations
did take place, during which Telecom informed
officials that it had a copy of the paper and that it considered that it might
be obliged
to disclose the information in it if it was genuine and reflected
Government policy. However Telecom was not told at any time that
the document it
had was authentic and contained a near final version of Government policy.
- Telecom
formed the view that it was reasonably likely that the document it had was a
genuine Cabinet paper after the Minister of Communications
telephoned Ms Theresa
Gattung, CEO of Telecom, at 4.38 p.m. to inform her that he would be holding a
press conference about the matter
at 5.15 p.m. (although not the content of that
press conference nor whether the masked paper was authentic).
- Telecom
obtained a copy of the Minister's announcement from the Government's "Beehive"
website4 at approximately 5.20 p.m. Telecom decided
that the contents of the announcement warranted a trading halt on the ASX to
allow the
market time to absorb the information. Telecom requested and received
a trading halt from the ASX from 3.42 p.m. (Sydney time) until
opening on the
following day. Telecom did not approach the NZX because it had already closed by
the time the Minister had made his
announcement, nor the NYSE since it had not
yet opened. In Telecom's view both of those markets would have time to adjust
for the
information before the next trading day.
- In
the Commission's view Telecom's actions in relation to handling its disclosure
obligations in relation to the information contained
in the masked paper were
taken in good faith to comply with the law and were understandable in the
circumstances. The Commission
accepts that Telecom was concerned not to mislead
the market by disclosing information that was likely to be price-sensitive but
was not verified as to its authenticity or its status as regulatory policy. The
Commission also accepts that the steps taken by Telecom
to authenticate the
paper and to determine its disclosure obligations were timely and appropriate.
- However
the Commission considers that it would have been appropriate for Telecom to have
sought a trading halt on the ASX once Ms
Gattung had been informed by the
Minister of the fact of his 5.15 p.m. press conference, whether or not they were
certain of the
content. As the ASX was the only relevant market open at that
time, this would have prevented trading in Telecom securities until
the markets
had full and equal information. The Commission considers that Telecom had
sufficient information at that time to draw
a reasonable inference that the
Minister's announcement would be price-sensitive. The Commission also considers
that Telecom had
had sufficient time at that point to have contacted the ASX to
arrange for a trading halt to be put in place if and when there was
sufficient
certainty that one was required.
- The
Commission does not consider that Telecom deliberately withheld material
information from the market, or that it acted negligently
or in bad faith. As
noted above the Commission considers that Telecom's actions were understandable
in what were very difficult circumstances.
However requesting a trading halt
sooner would have been the better course to take.
- The
Crown made submissions to the effect that the manner in which the confidential
Cabinet paper was given to Telecom meant that Telecom
personnel who received the
paper were under an obligation to return it to the Government and had no right
to use or retain the paper.
Accordingly, the Crown has submitted that there was
no issue of disclosure for Telecom. This is said to be so because of the legal
and constitutional conventions surrounding Cabinet documents, and the
confidential status accorded to these.
- The
Commission considers that once Telecom knew of the contents of the masked paper,
it possessed that information regardless of whether
it returned the document.
Accordingly, any issues regarding continuous disclosure would not have been
resolved by returning the paper.
- The
Commission has concluded that the issue does not need to be addressed within the
terms of reference of this inquiry because no
disclosure was in fact made by
Telecom. On 3 May 2006, both Telecom and the Crown received advice that there
might have been a disclosure
obligation on Telecom. The actions taken by both
parties on that day were influenced by this advice.
- Notwithstanding
that this issue does not need to be determined within the scope of this inquiry,
the Commission considers that the
Crown's submissions raise important questions
about the obligations on market participants who receive confidential material
information
from an unauthorised source. The Commission intends to look at these
questions further with a view to assessing whether the rules
applying to market
participants in these situations are sufficiently clear.
The Government
- The
Stocktake paper was intended to be part of the Government's late-May Budget
announcements. The Commission was advised that, with
the Budget release not
occurring for another 2-3 weeks, the Government had not yet turned its mind to
formulating a formal disclosure
process for the price-sensitive information
contained in the Stocktake paper on 3 May 2006.
- On
the afternoon of 3 May 2006, it seems that the Minister and officials were
conscious of the price-sensitive nature of information
in the Stocktake paper.
Details of the steps taken by the Government on that afternoon are set out in
the chronology at Appendix
B.
- We
note that there is a Cabinet Office Circular ("the Cabinet circular") which
provides guidance to Ministers for dealing with information
relating to publicly
listed companies. A copy of Cabinet Office Circular CO (02) 14 is set out in
Appendix D.
- The
Commission considers that the Government acted consistently with the guidelines
set out in the Cabinet circular, and with the
law. Although the principles in
the Cabinet circular were applicable, the Cabinet circular does not expressly
provide guidance about
making announcements of regulatory policy that might
affect the price of specific listed securities. However, the Commission
considers
that the Government could have taken alternative steps to avoid the
risk of asymmetry in the information in the market.
- Government
responses to Telecom's calls to Ministers and officials were carefully worded so
as not to expressly or implicitly authenticate
the document. This appears to
have been at least in part to avoid triggering Telecom's disclosure obligations.
Also, the Government
and officials did not at this time know how Telecom had
obtained the masked paper, nor whether any other party had also obtained
a copy.
- After
consulting with policy and legal advisers, it was decided that the Minister
would release the Stocktake paper at a press conference
at 5.15 p.m., which was
after the NZX had closed but in time for the 6.00 p.m. television news. At 4.26
p.m. the Office of the Communications
Minister issued a brief media advisory to
the effect that the Minister would be making a "major announcement" at 5.15 p.m.
The Minister
left a voicemail message with the Chief Executive of the NZX by
telephone. Further contact with the NZX was not pursued. In the event
Telecom,
the NZX, and the ASX were not advised at the same time as the media were advised
of either the 4.26 p.m. media advisory
or of the content of the 5.15 p.m.
announcement.
- We
understand that it was decided to release the Stocktake paper so that the
Government could manage the disclosure of its policy.
The Commission is
conscious that the timing and manner of the release of policy decisions is a
matter of Government prerogative.
However, as noted in the introduction to this
report it is important for the integrity of, and investor confidence in, the
capital
markets that the established procedures for releasing non-public
price-sensitive information are followed, including by the Government,
while
accommodating the Government's other legitimate interests.
- In
the Commission's view potentially price-sensitive information should not be
delivered solely through the media. The recognised
source of information about
listed companies is the relevant exchange. The exchanges are equipped to decide
whether steps such as
trading halts should be taken to ensure market
participants are equally informed so that prices adjust in an orderly fashion.
- In
the present case, it would have been appropriate to have advised both the New
Zealand market operator, namely the NZX, and issuers
affected, particularly
Telecom, in advance before any announcement by the Communications Minister was
made to the media that there
was going to be an announcement of price-sensitive
information. This may have enabled a trading halt to be put in place on both the
NZX and the ASX, which would have obviated the need to delay disclosure until
the NZX had closed, and ensured that trading on both
markets resumed on the
basis of equal, complete and up-to-date information.
- The
Commission accepts that the Minister and officials had less than three hours in
which to work through the issues and make decisions
in difficult and unusual
circumstances, and that they took the actions that they believed were
appropriate.
Recommendations
- The
Commission considers that in most circumstances notice of the information, or at
least the fact that price-sensitive information
is about to be released by the
Government, could be given to the NZX or the affected issuer who can then decide
under the Listing
Rules whether a particular course of action should be taken.
It would then be up to the NZX and/or the issuer to consider the implications
of
the announcement and the appropriate steps to take to ensure market transparency
(for example a decision on whether to initiate
a trading halt of the affected
securities).
- The
Government is in a different position from listed issuers and others in the
markets in that it must consider the wider national
interest as well as the
interests of the securities markets when deciding whether to make announcements
about policy that might affect
particular listed issuers.
- The
Commission recommends that the Government engage with the NZX with a view to
developing procedures and guidelines for disclosure
by the Government of
information which could be price-sensitive to listed securities, while
accommodating the Government's other
legitimate concerns. It would be
appropriate if these procedures made provision for advising the ASX where
affected securities are
also traded on the Australian market.
- The
Commission also considers that it may be appropriate to amend the Cabinet
circular to include any procedures and guidelines the
Government develops with
the NZX regarding the dissemination of price-sensitive information to the
market.
- The
Commission refers this report to the Prime Minister, as the person responsible
for making decisions regarding Cabinet guidance
for Ministers, to consider
whether the Government wishes to take any action regarding the development of
procedures and guidelines
on the release of market-sensitive announcements by
the Government.
Footnotes
- www.beehive.govt.nz
- www.beehive.govt.nz
PART III - THE EVENTS OF 16 MAY
2006
- On
16 May 2006 the Bloomberg news agency ("Bloomberg") published a series of
reports of an interview with Mr Cunliffe which included
comments attributed to
the Minister regarding Telecom's dividend prospects.
- Telecom
responded to the Bloomberg report later that day with an announcement stating
that it had not given any indications of its
capital management and future
dividend policy to the Minister. Telecom also noted that it had not received any
prior advice from
the Minister about the comments made to Bloomberg. Telecom
stated that it believed that the Minister's comments were not based on
any
confidential information. Telecom's media release is at Appendix E.
- On
17 May 2006 the NZX referred the statements reportedly made by Mr Cunliffe
regarding Telecom's dividend policy to the Commission
for investigation. NZX
referred the matter to the Commission for consideration under section 10(c) and
(caa) of the Securities Act
1978. The NZX stated that in its view the comments
attributed to the Minister were material and price-sensitive, but were not
released
to the whole market. Rather, they were carried by a wire service which
serves a section of the market, but to which the average retail
investor does
not have access.
Effect on the market - 16 May
2006
- The
Telecom share price opened at $4.50, traded briefly at $4.53 and at the time of
the first Bloomberg report at 12.26 p.m. was $4.41.
Volume from opening until
12.26 p.m. was just over 16.5 million shares. The share price had dropped $0.09
from opening bid throughout
the morning. From the release of the first Bloomberg
report at 12.26 p.m., the share price dropped by $0.06 to $4.35 within half
an
hour then continued to drop to its low for the day of $4.31 at 2.31 p.m. It then
rose to close at $4.39. Volume for the period
12.26 p.m. through to close was
just over 17.6 million shares.
- There
appears to have been an immediate but immaterial impact on the share price after
the Bloomberg announcement, and a recovery
towards the end of the day, following
Telecom's clarifying statements.
- On
the ASX Telecom quoted securities opened at A$3.65 and had dropped to A$3.61 at
the time of the Bloomberg report at 10.26 a.m.
(Sydney time). Following the
report the share price dropped to A$3.53 at 12.54 p.m. (Sydney time) and
recovered to close at A$3.60.
The relevant market data for the trading of
Telecom securities is set out in Appendix G.
Findings of the Inquiry
The Bloomberg reports
- On
16 May 2006 in an article entitled "Telecom NZ Investors May Face Lower
Dividends, Cunliffe Says", Bloomberg quoted Mr Cunliffe as
follows:
"Its investment levels have not been high relative, for
example, to its dividend flow" Cunliffe said in an interview yesterday in
Wellington. Greater competition and increased investment "may mean on the part
of shareholders that they need to accept that in the
short run there may be
somewhat lower dividend flows or lower returns" he said.
- The
article reported a few lines later that Mr Cunliffe said that the company's
dividend policy was a decision for Telecom's board.
- The
Commission has received a copy of the full transcript of the Minister's
interview with Bloomberg. A copy of the transcript is
at Appendix F. The
interview was quite long and the articles report only a very small part of what
the Minister said during the interview.
The quotes attributed to the Minister
were pieced together from comments made at different points over the course of
the interview.
- The
Minister's comment in respect of Telecom's relatively high investment levels was
made in response to a question early in the interview
about Telecom's past
strategy regarding broadband (see page 2 of the transcript). The Minister stated
in his response to that question
(and also to the previous question) that such
issues were ones that company boards have to manage and wrestle with.
- The
Minister made his comment in respect of lower dividend flows much later in the
interview (see page 6 of the transcript), in the
context of a question about the
possibility of Telecom restructuring its operations. The Minister's full
response to that question
is as follows:
I can't comment. I have
no information on that but whatever they do, I hope that they will face the
future not look backwards. I hope
that they will look after their customers,
including their wholesale customers, and that they will invest in the best
interests of
New Zealand and in the best long-term interests of their
shareholders. That may mean on the part of shareholders that they need to
accept
that in the short run there may be somewhat lower dividend flows or lower
returns and that just reflects the structural situation
that the company and the
country are both in.
- A
further question was asked as to whether the Minister would like to see Telecom
return less to shareholders and invest more. The
Minister's response to this
question was that "dividend decisions are obviously very sensitive decisions and
decisions that boards
need to make, it's not for Ministers". When asked whether
he wanted to "view an opinion" on this point, he responded "no".
No evidence of confidential or price-sensitive
information
- On
the evidence available to it, the Commission accepts that the comments made by
the Minister on 15 May 2006 to the Bloomberg news
agency were not based on any
confidential or price-sensitive information about Telecom's intentions or
policies, nor did the Bloomberg
reports give the impression that they were so
based.
- It
appears that some market participants assumed or guessed that the Minister's
comments did reflect confidential information that
would affect Telecom's
dividend policy and traded on the basis of this. Trading of this nature occurs
in the markets and does not
of itself mean that the market has been improperly
or unequally informed.
- Those
market participants may have made those assumptions at least in part because the
Minister's communications portfolio has direct
influence over the operational
activities of Telecom. Also, the Minister had released material information on 3
May 2006, which included
recommendations for regulating Telecom's broadband
business operations.
- The
present case serves as a general reminder that market participants may perceive
statements made by persons with authority in relation
to a listed issuer as
being made with the benefit of non-public knowledge or information about the
issuer. "Persons with authority"
will include directors and senior executives of
the issuer, and may also include external parties who have a close association
with
or influence over the issuer. If such a perception is created about matters
that may be price-sensitive, the price of the issuer's
quoted securities might
be affected. If the perception is incorrect, then the resulting price change may
not accurately reflect the
value of the affected securities.
- The
Commission notes that the Bloomberg interview was one of several given to media
agencies after the release of the Stocktake paper.
It is part of the role of a
Minister of the Crown to convey policy decisions and their reasons and
consequences to the public through
the news media.
- The
Commission also notes that Bloomberg is a subscription service and so reports
only to its subscribers. In the Commission's view
the Minister is entitled to
make comments to agencies that serve only a section of the market if the
comments made are not based
on any confidential or price-sensitive information.
Recommendations
- The
Commission notes that Cabinet Office Circular CO (02) 14 contains relevant
guidance for Ministers. At paragraphs 6 and 7 it provides
that:
"It is almost impossible to predict the questions and
issues that could be raised with Ministers by the media and other third parties
on any particular issue at any particular time. Therefore, Ministers and
officials should act cautiously when dealing with matters
relating to a publicly
listed company or a commercial agency in the wider state sector. There could be
a perception that the Crown
has access to confidential information...Market
participants may act on statements by Ministers, even if those statements are
made
without the benefit of confidential information. Such market participant
action may then impact on the market price for the publicly
listed company's
shares..."
- The
Commission notes its view that this guidance is appropriate and recommends that
it continue to be brought to the attention of
Ministers and officials.
- Disclosures
made by way of a written announcement to the relevant exchange will usually be
published verbatim to the market as a whole.
Other public comments, especially
if they are verbal, can be misinterpreted or quoted out of context, and
disclaimers and qualifying
statements may be overlooked or under-emphasised. As
a general point, the Commission recommends that all persons who may be assumed
by the market to be in possession of non-public information about a listed
issuer exercise caution when commenting publicly on matters
affecting that
issuer.
- The
Commission also reminds market participants that reported comments may not be a
complete or accurate reflection of what was actually
said.
APPENDIX A
TERMS OF REFERENCE
The Securities Commission ("the Commission") is conducting a review under
sections and of the Securities Act 1978 of the conduct and
circumstances
surrounding:
- the
release on Wednesday 3 May 2006 of the Government's Telecommunications Stocktake
Paper; and
- comments
reported to have been made on Tuesday 16 May 2006 by the Communications Minister
David Cunliffe about Telecom's dividend
policy.
In particular, the
Commission will consider whether the conduct and circumstances surrounding these
matters affected the transparent
and orderly functioning of the securities
markets.
The purpose is to form a view as to whether such conduct and circumstances
give rise to any issues of securities law, practices relating
to securities,
activities on securities markets.
In particular, the Commission wishes to consider:
- whether
any person misused any price sensitive information in relation to securities
contained in the Paper before that information
was publicly available;
- whether
any Government and/or state sector policies and procedures for handling
non-public price sensitive information in relation
to securities were
appropriate and properly applied in respect of these
matters;
- whether
any person could or should have taken, or refrained from taking, any actions in
respect of these matters to maintain the transparent
and orderly functioning of
the securities markets in New Zealand or elsewhere.
Accordingly the
Commission will obtain, consider and utilise information for the purposes of any
recommendation, report or comment
the Commission may decide to make under
sections 10(b), 10(c) or 10(caa) of the Securities Act 1978.
SUBJECT to the Commission's discretion to amend these Terms of Reference as
it may consider fit.
May 2006
APPENDIX B
Chronology of key events
(All times have been converted to New Zealand Standard time)
Friday, 28 April 2006
- The Cabinet
document relating to the telecommunications stocktake review ("the Stocktake
paper") was circulated to Cabinet Ministers,
in preparation of a Cabinet Meeting
scheduled for Monday morning 1 May 2006.
Monday, 1 May
2006
- Cabinet met,
considered the Stocktake paper, and decided to delegate to the Policy Committee
of Cabinet the finalisation and approval
of the telecommunications stocktake
policy. The Committee was scheduled to meet on Wednesday morning 3 May
2006.
Tuesday, 2 May 2006
A.M.
- Mr Michael Ryan,
a messenger employed by the Department of Prime Minister and Cabinet ("DPMC"),
took a copy of a Cabinet document
relating to the telecommunications stocktake
review ("the paper") from within an office in the DPMC, where it had been left
for destruction
by attendees at the previous day's Cabinet meeting. The policy
proposals set out in the paper given to Mr Garty had not been approved
by
Cabinet at that time.
P.M.
- At around 11.00
p.m. Mr Ryan passed the paper to a friend, Mr Peter Garty, Group Financial
Controller for Telecom Corporation of New
Zealand Limited ("Telecom"). Later
that evening, Mr Garty made a photocopy of the paper.
Wednesday,
3 May 2006
A.M.
- At around 7.30
a.m. Mr Garty returned the paper to Mr Ryan. Mr Ryan then returned the paper to
the DPMC offices.
- At around 8.30
a.m. Mr Garty arrived at Telecom. He made a masked copy of the front page of the
paper so as to remove the document
identifiers that had appeared on it. He
destroyed the original front page and replaced it with the masked copy front
page ("the masked
paper").
- At approximately
9.45 a.m. Mr Garty showed the masked paper to Mr David Knight, Telecom's New
Zealand General Counsel (who was the
first of Telecom's senior legal advisers to
become available that day).
- Between 10.30
a.m. to 12.30 p.m. most of Telecom's executive team and directors were either in
Sydney or enroute to Sydney to attend
a series of meetings concerning Telecom's
forthcoming third quarter results.
- At around 10.30
a.m. Mr Knight had contacted a number of Telecom's executives and arranged to
have a copy of the executive summary
of the masked paper to be sent, by
facsimile, to them for review.
- At around 11.00
a.m. the Cabinet Policy Committee made its decision to adopt the recommendations
contained in the Stocktake paper,
subject to certain
changes.
P.M.
- At around 1.00
p.m. Telecom executives met to discuss the matter. It was agreed that Telecom
might be required by stock exchange listing
rules to disclose the information
contained in the masked paper, if the document was genuine and reflected settled
government policy.
It was decided to contact the apparent source of the
document, the Government, to ascertain the authenticity and status of the masked
paper.
- Between 1.30
p.m. and 2.30 p.m. Telecom executives tried to contact various Ministers and
officials:
- Ms
Theresa Gattung, Chief Executive Officer of Telecom, rang Mr David Cunliffe,
Minister of Communications, on his mobile telephone
and left a message detailing
the situation. She advised in her message that unless Telecom could be assured
that the paper did not
represent the Government's position, Telecom could be
obliged to disclose the information to the market;
- Ms
Gattung telephoned Mr Maarten Wevers, Chief Executive Officer of the Department
of the Prime Minister and Cabinet, and left a message
with his assistant;
- Mr John
Goulter, Telecom's Public Affairs and Government Relations Manager, telephoned
the Office of the Communications Minister,
Mr David Cunliffe and spoke to his
Communication Adviser. He asked her to tell the Minister that Ms Gattung had
left him an urgent
message on his mobile telephone;
- Mr
Goulter then telephoned Ms Heather Simpson, Chief of Staff to the Prime
Minister, and briefed her on the situation. Ms Simpson
did not confirm the
status of the document described to her by Mr Goulter. To the contrary she
expressed the view that she did not
believe it could be a Cabinet paper;
- Ms
Gattung then telephoned the Prime Minister and left a message on her mobile
phone explaining the situation and advising that Telecom
was seeking to
ascertain the status of the paper;
- Mr
Goulter attempted to contact Ms Simpson once more and spoke to her assistant who
advised him that she was unavailable.
- At around 1.45
p.m. Mr Cunliffe became aware of the message left by Ms Gattung on his mobile
telephone.
- Between 2.00
p.m. and 3.00 p.m. Mr Cunliffe attended the House for Question Time.
- At around 3.00
p.m. Mr Cunliffe met with a number of senior Government officials to discuss the
course of action to take. At this
meeting, a preliminary conclusion was reached
that it was important that all participants in the market had the same
information
promptly, and that the consensus was that the Minister should make
an announcement after the New Zealand market was closed.
- By 3.30 p.m.
Telecom had received external legal advice that agreed with the inhouse view
that Telecom may be obliged to disclose
the information in the masked paper if
it was genuine, and that Telecom should continue to try to ascertain the status
of the document.
- Between 3.30
p.m. and 5.30 p.m. Telecom continued to hold its Committee Meetings in Sydney,
which included members of the Board.
- At approximately
4.00 p.m. it was decided by the Minister and his officials that the Government
would formally release the Stocktake
paper to the public.
- At 4.15 p.m. it
was decided by the Minister and his officials that an announcement should be
made at 5.15 p.m.
- At 4.26 p.m. the
Office of the Communications Minister issued a media advisory stating that the
"Communications Minister David Cunliffe
will make a major announcement at 5.15
p.m. in the old Legislative Council chambers". This was issued by emailing or
faxing to particular
journalists. It was also posted on the Beehive website (www.beehive.govt.nz). It was not sent to Telecom, the NZX, or ASX.
At
4.28 p.m. Mr Goulter received a call from the media enquiring about the
Minister's 4.30 p.m. media advisory. This was the first
time Telecom became
aware of the media advisory.
- At 4.38 p.m. Mr
Cunliffe telephoned Ms Gattung to advise her of the 5.15 p.m. press conference.
Immediately following that call, Ms
Gattung immediately briefed her senior team.
It was at this point that her senior team, including Telecom's Group General
Counsel,
Mark Verbiest, formed the view that the masked paper was most probably
genuine.
- At approximately
4.45 p.m. Mr Cunliffe made a telephone call to the Chief Executive of the New
Zealand Exchange Limited, but the Chief
Executive was unavailable.
- At 5.15 p.m. the
Minister formally released the Stocktake paper and the Government's position on
the recommendations outlined in the
document. The paper was also made available
online via the Government's Beehive website.
- At approximately
5.20 p.m. Telecom obtained a copy of the released Stocktake paper from the
Beehive website.
- At approximately
5.30 p.m. Telecom requested a trading halt on the Australian Stock Exchange. A
trading halt on the Australian Stock
Exchange was implemented from 5.42 p.m.
until the opening of the following day.
- At 5.56 p.m. Ms
Simpson returned Mr Goulter's earlier call. Ms Simpson advised that the
Government's decision to announce had been
made and that it was now publicly
known so there was no point in discussing the matter
further.
Thursday, 4 May 2006
- At 1.30 a.m.
trading of Telecom American Depositary Receipts opened on the
- New York Stock
Exchange.
APPENDIX C
Markey data graph May 03
NZX Price/Volume activity in TEL on 3 May 3006
View enlarged image
ASX Price/Volume activity in TEL on 3 May 3006
View enlarged image
APPENDIX D
Cabinet Office CircularCO (02) 14 15 October 2002
View
as PDF file (614KB)
APPENDIX E
Telecom media release 16 May 2006
View
as PDF file (74KB)
APPENDIX F
Bloomberg interview
Transcript of an interview with communications minister David Cunliffe in
wellngton on May 15 2006 on Telecom by Bloomberg news agency.
view
as PDF (832KB)
APPENDIX G
Market data graph - May 16 2006
NZSX Price/Volume activity in TEL on 16 May 3006
View enlarged image
ASX Price/Volume activity in TEL on 16 May 3006
View enlarged image
APPENDIX D
CO (02) 14
Cabinet Office Circular
15 October 2002
Enquiries: Kirstie Drake, Ministry of Economic
Development
Ph: 474
2887
Natalie Baird, Cabinet Office
Ph: 471 9741
All Ministers
Parliamentary Under-Secretaries
All Chief Executives
Chief of Staff, Prime Minister's Office
Chief of Staff' Office of Hon
Jim Anderton
All Senior Private Secretaries
All Private Secretaries
Copies to:
Speaker of the House of Representatives
Clerk of the House
of Representatives
Controller and Auditor-General
Guidance for Dealing with Information Relating to Publicly Listed
Companies
Key Points
Ministers and officials should treat information
received from commercial entities cautiously. If the Crown holds inside
information,
and if it is an insider under the insider trading legislation, it
will be required to observe insider trading laws. Where the Crown
is an insider
and holds inside information, Ministers and officials should not:
- disclose that
information to third parties;
- act on that
information by buying or selling shares in the publicly listed company;
- advise or
encourage others to buy or sell shares in the company;
- advise or
encourage others to advise or encourage third parties to buy or sell shares in
the company;
- comment on the
publicly listed company's value, the value of its shares or its prospects as a
company.
- Even if
confidential information is not actually possessed by the Crown, caution is
required when acting on issues relating to a publicly
listed company because
there may be a perception that the Crown has access to confidential
information.
- Government
departments should report to Ministers on a case by case basis with respect to
any issues that arises to which these guidelines
apply.
Introduction
- 1
Cabinet has agreed that guidance be issued setting out general principles on
dealing with information relating to publicly listed
companies. The purpose of
this circular is to set out guidance for Ministers and officials dealing with
information relating to publicly
listed companies including both those in which
the Crown has an ownership interest and those in which it does not.
- 2
The guidance in this circular sets out a general approach for dealing with
information relating to publicly listed companies. Ministers
and chief
executives should ensure that the relevant government department provides
specific advice on individual situations as they
arise.
General
Principles
- The
general nature of the relationship between Ministers and publicly listed
companies in which the Crown has an ownership stake may
be usefully informed by
some of the principles underlying the role of Ministers generally. These
principles include:
3.1
Ministerial focus should be on government
policy and monitoring rather than day-to-day
operations.
3.2
Ministers should not endorse any product or
service. Ministers should restrict any comment to policy endorsement, not
product endorsement.
3.3
Ministers should take care to ensure
that no conflict exists or appears to exist between their public duty and their
private interests.
Perception can often be as important as reality in
establishing what is acceptable behaviour.
3.4
As Ministers have
the capacity to exercise considerable influence, they should take care to ensure
their intentions are not misunderstood,
and they do not inadvertently or
inappropriately influence third parties, or involve themselves in matters which
are not their responsibility.
- Further
information on these principles can be found at paragraphs 2.46-2.77, 2.160 and
2.170-2.I85 of the Cabinet Manual 2001
Dealing with
Commercial Information - Exercise Caution
- 6
Ministers should treat information received from commercial entities cautiously.
There are more constraints on the use of such information
than on information
obtained from the core state sector. These constraints include insider trading
legislation, consumer legislation
(eg the Fair Trading Act 1986), the provisions
of the Companies Act 1993, and the terms and conditions of any confidentiality
agreement
under which the government has received the information. This circular
is primarily concerned with the constraints imposed by insider
trading
legislation.
- It
is almost impossible to predict the questions and issues that could be raised
with Ministers by the media and other third parties
on any particular issue at
any particular time. Therefore, Ministers and officials should act cautiously
when dealing,with matters
relating to a publicly listed company or a commercial
agency in the wider state sector. There could be a perception that the Crown
has
access to confidential information. For example, this perception is likely to be
strong with respect to Air NZ at this time given
the Crown has access to company
information under confidentiality agreements with Air NZ.
- 7
Market participants may act on statement. by Ministers, even if those statements
are made without the benefit of confidential information.
Such market
participant action may then impact on the market price for the publicly listed
company's shares. With respect to any
publicly listed company in which the
Government may consider trading shares, the Crown may be open to allegations of
manipulating
the market for its own benefit. Allegations are easily .made and,
even if illfounded, damage will have been done.
- 8
There is also fiscal risk for the Crown insofar as any drop in the share price
of listed companies in which it owns shares (eg Air
NZ) will impact on the value
of the Crown's shareholding. The Crown, if it breaches insider trading laws,
could also face claims
for compensation regardless of whether or not it owns
shares in the particular company, and possibly court-imposed
penalties.
Insider Trading Laws
- 9
Part I of the Securities Amendment Act 1988 sets out the provisions relating to
insider trading in the shares of publicly listed
companies. In general,
liability lies under this Act for the buying or selling of shares in publicly
listed companies by insiders
with inside information, and for tipping on inside
information by insiders. The key sections of the Securities Amendment Act 1988,
including the definitions of "insider" and "inside information", are annexed to
this circular.
Obligations on Publicly Listed Companies
- 10
The New Zealand Stock Exchange ('NZSE') Listing Rules govern how and when any
material information about a publicly listed company
is disclosed to the market.
In general, where a company is listed on the NZSE, it is required to disclose
all material information
that is not generally available to the NZSE, unless the
information comes within one of the exceptions in the Listing Rules. The
key
sections of the Listing Rules in force until 1 December 2002 on the obligation
to supply relevant information, and the Listing
Rules to come into force on I
December 2002 on continuous disclosure of material information, are annexed to
this circular.
- 11
This means that the publicly listed company is obliged to assess whether to
release information to the market. Release should be
made through the NZSE. If
Ministers provide material information to publicly listed companies (even if the
information is general
and not specifically related to that company) a company
will then be obliged to disclose that information to the market unless the
information comes within one of the exceptions in the Listing Rules. If a
company is also listed on any other securities exchange
in New Zealand or
overseas (eg the Australian Stock Exchange) it will also be required to disclose
information in accordance with
the listing rules of that
exchange.
Obligations on the Crown from holding inside
information of a Publicly Listed Company
- 12
A publicly listed company in which the Crown is a shareholder may make
information available to the Crown, but only with appropriate
confidentiality
agreements in place between the two parties. This information must also fall
within the exceptions to the, NZSE Listing
Rules or it will have to be disclosed
to the market.
- 13
In situations where the Crown is a shareholder in a publicly listed company and
holds material information relating to that company
because it is a shareholder,
any disclosure of this material information should be made by the Board of the
company itself not by
Ministers.
- 14
Where the Crown is an insider, the inappropriate use and/or premature disclosure
of information that could affect the market for
that company's securities could
lead to claims of insider trading and bring with it the possibility of inquiry
by the Securities
Commission or litigation.
- 15
Legal risks arise for the Crown if it is an insider, and if
it:
15.1
discloses the confidential information it receives to
others outside the Crown;
15.2
makes any statements in relation
to:
15.2.1
the publicly listed company's value or prospects as a
company;
15.2.2
the value of the publicly listed company's
shares; or
15.2.3
whether to buy or sell the publicly listed
company's shares;
15.3
buys or sells shares in the publicly
listed company; or
15.4
encourages others directly or indirectly
to buy or sell shares in a publicly listed company
- In
order to minimise the legal risks, Ministers, advisers and officials should
not:
16.1
disclose confidential information of the publicly
listed company to, or discuss it with, any person other than those within the
Crown
that have a legitimate need to know the information (ie Ministers,
officials and advisers directly involved in issues relating to
the publicly
listed company);
16.2
make any public or private statement or
comment to anyone (other than Ministers, officials and advisers directly
involved in issues
relating to the publicly listed company)
about:
16.2.1
the value or prospects of the publicly listed
company; and
16.2.2
the value of the publicly listed company's
shares;
16.2.3
whether or not someone should buy or sell shares
in the publicly listed company.
16.3
buy or sell shares in the
publicly listed company on behalf of the Crown or in their private capacities or
suggest that members of
their family or anyone else does so if they are an
insider and hold inside information;
16.4
discuss progress on, or
the outcome of, any initiatives that are being advanced involving the Crown's
interests in the publicly listed
company or its business (other than with
Ministers, officials and advisers directly involved in issues relating to the
publicly listed
company);
16.5
suggest to anyone else that they
should advise or encourage other people to buy or sell shares in the publicly
listed company.
- The
Official Information Act 1982 applies to all information held by the Crown. Any
request under the Official Information Act for
public company information held
by the Crown should be handled in accordance with the requirements of the Act.
The request should
be considered in consultation with the relevant publicly
listed company. Although each request will be considered as it arises under
the
terms of the Act, given the sensitive nature of inside information, it is likely
such information would be withheld. If the information
had already been released
onto the market then it could not be withheld.
Legitimate
Government Action
- There
will be times when Ministers feel compelled to comment on or take action with
respect to a publicly listed company in the national
interest. It would only be
appropriate to comment or take action on the publicly listed company's business
issues after the company
itself has provided the information to the market
through the NZSE, and then only to the extent that the company has informed the
market,
- 19
Where the Government is actively involved in a transaction involving a publicly
listed company, Ministers may feel duty-bound to
comment publicly. As a first
measure, the publicly listed company should communicate the appropriate details
of the proposal to the
market through the NZSE. Ministers could then make
statements about the proposal, the detail of which should go no further than
that
disclosed to the market by the publicly listed company.
- 20
Ministers may consider it in the public interest to address certain issues that
the publicly listed company would not (eg national
interest issues). Ministers
would need to avoid saying anything that would materially affect the market
price of the publicly listed
company's shares.
- 21
Where the Government has a regulatory role in the industry in which a publicly
listed company in which is has an interest operates,
it is appropriate to
undertake regulatory action such as making policy announcements that affect the
whole industry. In such circumstances,
there should be a clear internal
separation of the Government's ownership role and its regulatory
role.
Review of Insider Trading Laws
- 22
The Government has signalled its intention to carry out a full review of insider
trading laws. As legislation changes, so too will
the obligations on publicly
listed companies and insiders. This guidance will be updated in accordance with
any legislative changes.
Further Guidance
- 23
Further context-specific guidance should be provided by the relevant Government
department in response to individual situations
as they arise. Specific advice
should cover whether information can or cannot be disclosed, and potential
liabilities pertaining
to the particular issues at hand. It may also be possible
to anticipate and preempt tile questions that might arise from the media.
- 24
For further information on the general guidance in this circular, please
contact:
24.1
Kirstie Drake in the Ministry of Economic
Development; or
24.2
Natalie Baird in the Cabinet
Office.
Marie Shroff
Secretary of the Cabinet
ANNEX.
SECURITIES AMENDMENT ACT 1988 [Extract]*
(* The Securities Markets
and Institutions Bill, currently before Parliament, may, when enacted change the
name of this Act to the
Securities Markets Act 1988.)
- 2.
Interpretation - ...
"Inside information". in relation to a public
issuer, means information which- ,
- (a)
Is not publicly available; and
- (b)
Would, or would be likely to, affect materially the price of the securities of
the public issuer if it was publicly available:
- 3.
Meaning of "insider" - (1) For the purposes of Part I of this Act, "insider" in
relation to a public issuer, means-
- (a)
The public issuer:
- (b) A
person who, by reason of being a principal officer, or an employee, or company
secretary of, or a substantial security holder
in, the public issuer, has
inside. information about the public issuer or another public
issuer:
- (c)
A person who receives inside information in confidence from a person described
in paragraph (a) or paragraph (b) of this subsection
about the public issuer or
another public issuer:
- (d) A
person who, by reason of being a principal officer, or an employee, or company
secretary of, or a substantial security holder
in, a person described in
paragraph (c) of this subsection, has that inside information:
- (e) A
person who receives inside information in confidence from a person described in
paragraph (c) or paragraph (d) of this subsection
about the public issuer or
another public issuer:
- (f) A
person who, by reason of being a principal officer, or an employee, or company
secretary of, or a substantial security holder
in, a person described in
paragraph (e) of this subsection, has that inside information.
- 7.
Liability of insider who deals in securities of a public issuer - (1) An
insider of a public issuer who has inside information about the public issuer
and who -
- (a)
Buys securities of the public issuer from any person; or
- (b)
Sells securities of the public issuer to any person -
is
liable to the persons referred to in subsection (2) of this section. .
(2)
The persons to whom the insider is liable are -
- (a)
In a case where the insider buys securities of the public issuer, any person
from whom the securities are bought for any loss
incurred by that person in
selling them to the insider:
- (b)
In a case where the insider sells securities of the public issuer, any person to
whom the securities are sold for any loss incurred
by that person in buying them
from the insider:
- (c)
The public issuer for -
- (i)
The amount of any gain made or loss avoided by the insider in buying or selling
the securities; and
- (ii)
Any amount which the Court considers to be an appropriate pecuniary
penalty.
- 9.
Liability of insider for tipping about securities of a public issuer -
(1) An insider of a public issuer who has inside information about the public
issuer and who-
- (a)
Advises or encourages any person to-
- (i)
Buy or sell securities of the public issuer; or
- (ii)
Advise or encourage any other person to buy or sell securities of the public
issuer; or
- (b)
Communicates the information, or causes the information to be disclosed, to a
person knowing or believing that person or another
person will, or is likely
to,-
- (i)
Buy or sell securities of the public issuer; or
- (ii)
Advise or encourage another person to buy or sell securities of the public
issuer is liable to the persons referred to in subsection
(2) of this
section.
(2)The persons to whom the insider is
liable are -
- (a)
Any person who sells securities of the public issuer to a person who is advised
or encouraged by the insider to buy securities
of the public issuer for any loss
incurred by that person:
- (b)
Any person who buys securities of the public issuer from a person who is advised
or encouraged by the insider to sell securities
of the public issuer for any
loss incurred by that person:
- (c)
Any person who sells securities of the public issuer to a person referred to in
subsection (l)(a)(ii) of this section who is advised
or encouraged to buy the
securities for any loss incurred by that person:
- (d)
Any person who buys securities of the public issuer from a person referred to in
subsection (l)(a)(ii) of this section who is
advised or encouraged to sell the
securities for any loss incurred by that person:
- (e)
Any person who sells securities of the public issuer to a person referred to in
subsection (l)(b)(i) or (ii) of this section for
any loss incurred by that
person:
- (f)
Any person who buys securities of the public issuer from a person referred to in
subsection (l)(b)(i) or (ii) of this section
for any loss incurred by that
person:
- (g)
The public issuer for-
- (i)
Any consideration or benefit received by the insider; and
- (ii)
Any gains made, or losses avoided, by the persons referred to in subsection (2)
of this section in buying the securities from
or selling them to the persons to
whom the insider is liable; and
- (iii)
Any amount which the Court considers to be an appropriate pecuniary
penalty.
NZSE LISTING RULES - in force until 1 December
2002 [Extract]
Rule 1.1.2 Relevant Information means at any time information received or
generated and held by an Issuer about its undertaking, activities,
business
environment, prospects, financial position, or financial performance which is
not reasonably available to an informed investor
in the market in a form
substantially as useable as the form in which it is available to the Issuer, and
which upon disclosure to
the market would, or would be likely to, affect
materially the market price of any of the Issuer's Quoted Securities.
Rule 10.1.1 Obligation to Supply Relevant Information: Without limiting any
other Rule, every Issuer shall:
- (a)
treat all Relevant Information as valuable property of the Issuer, to be used
and applied strictly for the overall benefit of
the Issuer;
- (b)
safeguard all Relevant Information and take all reasonable steps:
- (i)
to ensure that it is not divulged to persons not entitled to receive it;
and
- (ii)
to avoid knowingly letting any person acquire, or remain in, a position of
privilege in relation to other holders or prospective
holders of Quoted
Securities of the Issuer by use of Relevant Information to deal in such
Securities;
- (c)
release all Relevant information to the Exchange immediately it ceases to have
greater value to the Issuer (in distinction to
its Equity Security holders or
any of them) for the information to remain confidential. It shall not be a
sufficient reason to withhold
relevant information, that release of it may
adversely affect the market price of any of the Issuer's Quoted Securities, or
its ability
to attract and retain debt financing on favourable
terms;
- (d)
release all Relevant Information to the Exchange no later than it is received
by:
- (i)
any person who is not bound by corresponding obligations of confidence with
which that person is likely to comply; or
- (ii)
ally person who is likely to use it in deciding whether or not to deal with
Quoted Securities of the Issuer or to divulge it,
directly or indirectly, to any
such person; and
- (e)
release Relevant Information to the Exchange to the extent necessary to prevent
development or subsistence of a market for its
Quoted Securities which is
materially influenced by false or misleading information emanating from:
- (i)
the Issuer or any Associated Person of the Issuer; or
- (ii)
other persons in circumstances in each case which would give such information
substantial credibility.
NZSE LISTING RULES - in force
from 1 December 2002 [Extract]
Rule 1.1.2 Material Information in relation to an Issuer is information
that:
- (a) a
reasonable person would expect, if it were generally available to the market, to
have a material effect on the price or value
of Quoted Securities of the Issuer;
and
- (b)
relates to particular securities, a particular Issuer, or particular Issuers,
rather than to securities generally or Issuers generally.
Without
limiting what information a reasonable person would expect to have a material
effect on the price or value of Quoted Securities
of an Issuer, for the purposes
of this definition, a reasonable person would be taken to expect information to
have a material effect
on the price or value of Quoted Securities of an Issuer
if the information would, or would be likely to, influence persons who commonly
invest in securities in deciding whether to buy or sell those Quoted
Securities.
For the purposes of this definition information is generally available to the
market if:
- (c)
it is information that:
- (i)
has been made known in a manner that would, or would be likely to, bring it to
the attention of persons who commonly invest in
relevant securities; and
- (ii)
since it was made known, a reasonable period for it to be disseminated among
those persons has expired; or
- (d)
it is likely that persons who commonly invest in relevant securities can readily
obtain the information (whether by observation,
use of expertise, purchase from
other persons, or any other means); or
- (e)
it is information that consists of deductions, conclusions, or inferences made
or drawn from either or both of the kinds of information
referred to in
paragraphs (c) and (d). In this definition, relevant securities means securities
of a kind the price or value of which
might reasonably be expected to be
affected by the information.
Rule 10.1.1 Continuous Disclosure of
Material Information: Without limiting any other Rule, every Issuer shall:
- (a)
once it becomes aware of any Material Information concerning it, immediately
release that Material Information to the Exchange,
provided that this Rule shall
not apply when:
- (i) a
reasonable person would not expect the information to be disclosed; and
- (ii)
the information is confidential and its confidentiality is maintained; and
- (iii)
one or more of the following applies:
- (A)
the release of information would be a breach of law;
- (B)
the information concerns an incomplete proposal or
negotiation;
- (C)the
information comprises matters of supposition or is insufficiently definite to
warrant disclosure;
- (D)
the information is generated for the internal management purposes of the Issuer;
or
- (E)
the information is a trade secret.
In this Rule,
an Issuer is aware of information if a Director or an executive officer of the
Issuer has come into possession of the
information in'the course of the
performance of his or her duties as a Director or executive officer.
- (b)
not disclose any Material Information to the public, other Recognised Stock
Exchanges (except as contemplated in the footnote
to this Rule) or other parties
except those parties to whom the proviso to Rule 10.1.1 (a) applies:
- (i)
prior to disclosing that Material Information to the Exchange; and
- (ii)
prior to an acknowledgement from the Exchange of receipt of that Material
Information.
- (c)
release Material Information to the Exchange to the extent necessary to prevent
development or subsistence of a market for its
Quoted Securities which is
materially influenced by false or misleading information emanating from:
- (i)
the Issuer or any Associated Person of the Issuer; or
- (ii)
other persons in circumstances in each case which would give such information
substantial credibility,
even if the proviso to Rule 10.1.1 (a)
applies.
APPENDIX E
16 May 2006
MEDIA RELEASE
Statement from Telecom in response to reported comments by Communications
Ministe David Cunliffe
Telecom said today, as it had previously advised, it would update the market
on its capital management plans no later than its fourth
quarter announcement in
August. Telecom also confirmed, as it said on Friday, it would give an update on
the business implications
of the Government policy by late June, including
guidance on capital expenditure for 2006-07.
Telecom Chairman Roderick Deane said Telecom had not given any indications on
capital management and future dividend policy to the
Minister of Communications
David Cunliffe,
Nor did Telecom receive any prior advice from Mr Cunliffe about the comments
he made today.
Dr Deane said Telecom needed to assure the market, the NZX and the Securities
Commission that those comments appear to have been speculation
on Mr Cunliffe's
part.
Dr Deane said Telecom is totally committed to the new direction it outlined
last week.
ENDS
For inquiries please contact:
John Goulter
Public Affairs &
Government Relations Manager
0272324303
APPENDIX F
ATT1854791
N.Z.'s Cunliffe comments on Telecom, Competition (Transcript)
2006-05-16
23 : 40 (New York)
The following is a transcript of an interview with New Zealand communications
Minister David Cunliffe in wellngton on May 15 on Telecom
Corp, the government's
decision to regulate the company's fixed-line network and the outlook for the
industry and high-speed Internet
services.
(This is not a legal transcript. Bloomberg LP cannot guarantee its
accuracy.)
Why does the government care about broadband? Why are you getting
involved?
It's a critical national infrastructure. New Zealand's overall development
strategy is to transform itself from being a primary, commodity-dependent
exporter, a farm at the bottom of the South Pacific if you like or a world-class
maker of protein products, into a country which
across-the-board has industrial
sectors enabled by advanced technology . The communication and dissemination
route for that is increasingly
broadband.
we are in the bottom third of the OECD for broadband penetration and
approximately three years behind the OECD average for the uptake
curve and that
puts us at a competitive disadvantage which we think is unsustainable for a
small, smart country.
we think consumers have not, over the last few years, been getting value that
they should have got in terms of pricing, service or
product choice in the
telecommunications sector. The Telecommunications Act requires the minister to
act-to the longrun benefit of
consumers or end users of telecommunications
services .
The prime minister signaled this exercise both in her opening address to
Parliament and the Governor General in the speech from the
throne at the start
of this parliamentary term so as a government you can't put things up in neon
light: much more clearly than saying
this really matters to us and taking those
two steps.
What does it mean for the economy if broadband gets cheaper and faster and we
have higher penetration?
There will be a wave of innovation in the technology space and there will be
a significant GDP kick that comes with that. We will
drop some input-costs to
business and to consumers and that will make our companies more competitive. It
is impossible to be precise
or certain about the exact quantum of that
impact.
underlying this cabinet paper there are a-dozen-or so consulting reports and
departmental research papers including some quantitative
modelling which we will
release a little later which demonstrates that the regulatory package that we
put together stands the best
chance of optimizing our GDP pathway.
How big that affect is, is the subject,of much debate. The Economist
Intelligence Unit did a quantitative study of the New zealand
economy and
measured the difference between the status quo and achieving our digital
strategy objectives as being about NZ$14 billion
of GDP by 2030. I'm not saying
their numbers are right but even if it was half that it would be a big number.
Half that is roughly
equal to the market cap of Telecom. So it matters.
Ericsson and a consulting firm did a study ,that showed a GDP return of about
NZ$8 for every dollar invested in broadband infrastructure.
Alcatel and KPMG did
a study showing a 0.5 to 2.5 percent GDP increase from meeting the kind of
broadband targets we are looking
at. The experts differ but there seems to be
little doubt that the answer is a very large number, and arguably one of the
most obvious
things that a government can do to support an economic
transformation agenda of the type that we are talking about
Has the government got its own estimate?
we have made Some estimates as well. we haven't put a precise number on it.
But what we have got is some quantification underneath
the different regulatory
scenarios to examine the impacts that they might have on the economy and on the
sector so obviously we picked
what we think is the optimal combination.
Can you tell me a number?
No, because it's caveated heavily around the fact that the numbers are
indicative but we think that the comparison between the scenarios
is reasonable
so that has given us some confidence that we have probably got a pretty good mix
of tools in the tool kit.
Is half of the EIU (Economist Intelligence unit) outcome realistic as to what
might happen?
I think taking half the EIU estimate would be relatively conservative.
so at least that?
Yeah, I would have thought.
what do you think of the argument that the reason that New Zealand has poor
broadband uptake is because we are not a wealthy country?
I think the Technical term is it's crap. If you do a scatter-plot showing a
correlation between GDP and broadband you find there isn't
one. There is no
regressible correlation. so, case proven. It's also self defeating. If the logic
is that broad band is an enabler
of economic performance then to say that
because we are a poor country we shouldn't try to improve it locks you into
being a poor
country forever. That's the second-worst argument that's been
raised in the debate in my view. The very worst is the property-rights
argument,
which is utterly spurious when 28 out of 30 OECD countries have a stronger
regulatory framework than New Zealand, or at
least did, and where risk is priced
into the telco stock price by markets and analysts every day of the week. It
can't be a sacred
cow if people are already estimating the impacts.
Arguably one of the key jobs that the board of any incumbent telco has to do
is to manage its relationship with the regulator so that
they are optimizing
their earnings over a long period of time, not pushing it so hard in the short
term that they then incur a reaction
in the medium term.
Is that what you think Telecom has done?
The paper that we have written and my own comments are at pains to say that
our approach is to be pro-New Zealand and not anti-Telecom,
so I am not painting
Telecom in a negative space and others in a positive space. I would rather say
that companies all make decisions
about how they represent best their
shareholders' interests and reasonable people can disagree about that.
But the evidence in terms of Telecom's delivery on some of the voluntary
commitments that it made last time we discussed unbundling
was that arguably
only one out of three of them was met, and that taking at least a five-year
historical average, its investment
levels have not been high relative, for
example, to its dividend flow. These are trade offs that boards wrestle
with.
what do you think of Telecom's attitude during this process?
We have had quite a number of constructive discussions with Telecom during
the stock-take process, as we have with every other player
in the market and we
have also sought views or obtained views from the investor community and pretty
much everybody that matters
in telecommunications, including the consumer
representative groups.
we have many times invited Telecom to be specific about the future, and the
conversations are of course confidential, but with the
best will in the world,
Telecom was not able to put on the table specific enough commitments that would
change our view of the future.
Not enough then?
Not specific enough.
How surprised are you that they didn't see this coming and keep the market
better informed?
Any judgment about Telecom's performance in relation to its disclosure
obligations is for the market and for Telecom and I'm not going
to comment on
that. I would be surprised if Telecom was surprised about the fact that
unbundling was coming. They may have been more
surprised that the package
covered off on a number of associated issues all at one time. Part of the reason
it was able to do that
is that we had the benefit of looking to see what nearly
every other country in the OECD had tried and felt that we were able to
learn a
few of the lessons that others had learnt.
In particular we were attracted to the EU OECD approach which is called the
ladder of investment which uses a retail minus pricing
principal on the
unbundled bitstream products, which usually leaves the incumbent in a rather
better position than with local loop
unbundling but doing that at the same time
that you have a cost based-pricing for LLU has two affects.
It provides an incentive for entrants to invest in their own DSLAMS to get
their own circuits running and to thereby to gradually
ascend the ladder of
investment and to their own competing infrastructure. It provides an incentive
for the incumbent to operate
a fair and reasonable wholesale market so as to
forestall that investment.
we have been able to forestall from what many others have done in setting the
incentives for good behavior or at least market-enhancing
behavior. It's not the
government's desire to be in the position of long-term intervention in this
market, rather what we seek to
do is a series of shorter-term interventions that
improve the quality of the competition in the market and as that competition
becomes
more intense and the playing field more level we would hope to be able
to withdraw some of the regulatory constraints.
when you say withdraw some of the constraints, what do you mean exactly?
The reform package is designed to induce more competition in the market,
facilitate the entry of more players. once there are more
players with a
foothold in the market, once the terms of competitive access to the loop and the
vigorous nature of intermodal competition
becomes established, arguably there
will be less of a role for government intervention as has been seen for example
with various
commission actions in the last couple of years.
The advantage of a more-competition-based approach is that the regulatory
process takes quite a while, a couple of years often, and
the product and market
cycles are speeding up so it's a fairly blunt instrument, we have tried to
future proof the regulator package
by allowing the commissioner the powers to
proactively identify and recommend measures to address future problems in the
market.
on the more recent reaction, how concerned are you about destroying the value
in Telecom given it's the, biggest stock on the market
and it's held by a lot of
overseas investors?
The package is designed to be pro-New Zealand and not anti-Telecom. Analysts
I'm sure will have caught up on the fact the fine print
of the cabinet paper
makes clear the pricing rules for UBS, naked DSL and local loop unbundling,
whether they are retail minus or
cost plus, all allow Telecom to earn a fair
return on capital, to cover its costs and make a return that presumably is
around WACC
or better.
If markets are rational that would imply that the value loss is attributable
to monopoly or economic rents. Nobody has a right earn
monopoly rents. They are
welfare destroying for the economy as a whole and no regulator wants to see them
in the market. The answer
to your question is , are markets rational?
Were you surprised at the share price slump?
There is a reasonable chance that the total price fall was accentuated by the
timing coincidence of the AAPT results which were unveiled
in Australia, of all
places, and the regulatory package being announced a couple of days prior. The
timing was of course not the
government's choosing but having been informed by
Telecom that they were in possession of a copy of our cabinet paper we were in
a
position where we had no option but to make the same information available to
the whole market.
Even the day after the release, before the AAPT news was out on the
Friday?
It dropped about 50 cents that day. That's not an unexpected amount.
Do you feel any responsibility for that?
I firmly believe based on an extensive amount of research that has been done
and underlies this package that we have done absolutely
the right thing. I don't
see that as value destruction as much as value reallocation from the incumbent
to consumers and from the
incumbent to entrants and the net result over time
should be a more vigorous market, future investment being made and a
productivity
gain to New Zealand as a whole, so no I have no regrets
whatsoever.
what is the state of the company's relationship with the government at the
moment?
we are in ongoing discussions with Telecom, as we are with other players on a
number of issues and those discussions are quite cordial.
I issued a statement
last Friday welcoming the statement of the chairman saying that Telecom would
cooperate with the regulatory
package.
Has it deteriorated at all going through this process, your relationship with
Telecom?
The discussions have been quite cordial all the way through the stock-take
process. I haven't personally had a discussion with the
chief executive or the
chairman since the announcement but I look forward to the next time that we get
together.
Do you know when that is?
No, we have agreed that the officials' discussions will continue and our
officials and their staff will report to their principals
at an appropriate
time.
There has been suggestion from analysts, investors , the shareholders
association that management of the company has to change because
they didn't see
this coming, didn't do the right things early enough and left it too long and
now it's too late. Roderick (Deane)
as said he is going early, do you think that
Theresa (Gattung) should go?
That's not a question I can answer and frankly my opinion is - my own
personal opinion. I would only repeat that there's certainly
been no sense from
myself or from the government of this space being anti any one company. we have
done what we genuinely believed
to be right for New Zealand, right for consumers
of telecommunication services and right for the productivity needs of the
economy
as a whole.
I think Telecom has got a very capable management team and they have done
what the think is in the interests of the company. Arguably
with the benefit of
hindsight, they might wish they had done something different. They have had
every opportunity to put specific
commitments in front of the government.
It seems (Prime Minister) Helen Clark been a bit more strident in saying she
thought they should have said more, earlier, to investors
and perhaps they
weren't as helpful as they could have been?
The prime minister may be freer to express a view here than the minister of
communications who has certain statutory responsibilities.
what sort of signals are you looking for from the company now. I'm thinking
in terms of what they are going to do with their investment
plans going forward,
dividend plans because I did note that there were comments about how they had
returned a lot to shareholders
and not invested enough, so what are you looking
to see?
The first thing we will look to see is cooperation from Telecom on the detail
design of the regulatory package provision of information,
fair and honest
disclosure of relevant information. we will look to see the manifestation of the
positive attitude that they described
last Friday in terms of the treatment of
their customers, particularly wholesale customers and quite clearly what we need
to see
there is non-discriminatory treatment as between Telecom's retail
subsidiaries and other retail players in terms of the behavior
of networks.
we essentially want a system that is blind to the ownership of the retail
provider. Telecom needs to consider how it delivers on that
and there are
various options. There is at least a very arguable case that the BT approach has
been value maximizing in similar circumstances
in the UK.
value maximizing for BT you mean?
Value maximizing for BT.
How likely is it that the government will continue on the mooted plan and
structurally separate the lines and the retail business?
We just simply haven't formed a view on that because the evidence isn't in
but I'm sure the behaviour Telecom in the next months will
be some of the
factors that we weigh up in addressing that issue a little later on. The
advantage of doing it voluntarily is of course
they are then more in charge of
the terms upon which it is done.
They don't seem to have ruled that out?
No, they don't seem to have ruled it out and indeed they made some internal
restructuring decisions before our announcement which
could arguably set them up
quite well for a move like that. If there are structural features that make
discrimination in the wholesale
markets less likely it takes some of the burden
off the behavioral disciplines that the regulator would need to impose. That's a
judgment call that they will need to weigh up, I can't answer that for them.
How would you view it if they did take the BT approach and voluntarily
separate?
Provided it was done on fair and non discriminatory terms, I would welcome it
.
Do you think it is likely they will do it?
I can't comment. I have no information on that but whatever they do, I hope
that they will face the future not look backwards. I hope
that they will look
after their customers, including their wholesale customers, and that the will
invest in the best interests of
New Zealand and in the best long-term interests
of their shareholders. That may mean on the part of shareholders that they need
to
accept that in the short run there may-be somewhat lower dividend flows or
lower returns and that just reflects the structural situation
that the company
and country are both in.
Is that one of the things that you are wanting to see, perhaps them reassess
their capital structure?
It's a decision for the board to make. Investment in this economy is
essential and non-discriminatory treatment of wholesale customers
is essential
so those are two factors that they will want to weigh up.
And whether you would like to see them perhaps not return so much to
shareholders and invest more?
Dividend decisions are obviously very sensitive decisions and decisions that
boards need to make, it's not for ministers.
So you wouldn't want to view an opinion on that?
No.
How likely is it do you think that they will defer investment in their
network? I spoke to Marko Bogoievski after the earnings in
Sydney and he said
the may look at how much they spend on their next-gen network and they may not
spend as much. He said they need
to make sure they get a return.
They do and they also need To make sure that other people don't eat their
lunch and the thing about a more competitive market is Telecom
is not the only
company capable of investing. There are plenty of others lining up to invest in
New Zealand so the first reason why
Telecom needs to invest is because they
don't want to be in a situation where they lose substantial market share in
future time periods
because they didn't invest now.
The second reason they may want to consider continuing or expanding their
investment is because it would be a tangible sign that they
are facing forwards
and are prepared to go forward into the new era in a positive way and I would
argue that that would be in the
long-term interests of their shareholders.
So is it fair to say you don't think it's very likely they will defer or
delay investment?
we haven't had any certainty about what the counterfactual would have been. I
don't know what Telecom's level of investment would
have been had the regulatory
package not been announced. But let me say again that there are both competitive
and regulatory reasons
why continuing or expanding investment practices and
programs would be a good idea, but that's a decision that Telecom needs to
make.
Fair to say you will be watching that closely and monitoring?
we will certainly be watching the investment closely.
You were quoted in an unlimited article before the stock-take was finished
where you said that unbundling might not be the solution
because they are
rolling out this new network which would effectively bypass it?
I have referred, I don't know if it was just in that article, to key
limitations with unbundling. It's never a single silver bullet.
It seems to be
the regulatory tool that the public understands or think they understand the
best. But of the dozen or so issues that
we have covered off on in the
stock-take review, that's just one so let's keep it in context.
If you only unbundled the exchange in an NGN world where fiber bypasses the
exchange and ends up in a roadside cabinet, you are not
going to have much of an
impact on the wholesale market. That's why our package says we will unbundle in
the cabinet and by UBS allow
access to the backhaul between the cabinet and the
exchange, as well as the exchange , itself .
what we won't do, however, is unbundle any fiber that goes out past the
cabinet as we do think there would be sensitivity of investment
to that.
I'm not a techy, can you explain that further?
currently you have got fiber to the exchange and wire copper from the
exchange to the home so the NGN proposal is you put your put
fiber past the
exchanges to a smaller unit called a cabinet which sits on the side of the road
and might service part of a street
rather than a suburb. The advantage of that
is of course the cabinet is closer to the extension which means that the ADSL2+
or whatever
is running on the copper between the cabinet and the home runs at a
much, much faster speed than if you had 7 or 8 kilometers from
the exchange
itself.
Cabinets are a lot smaller and they run a lot less lines off them so The
relative economics of a competitor putting a DSLAM in your
cabinet are a lot
less compelling than putting a DSLAM in the exchange proper. It's a good
defensive move from an incumbent and it's
value creating for society as a whole
because the speed to the consumer is increased.
we don't have a policy problem with Telecom putting fiber to cabinets. We
have allowed the unbundling of the cabinet as well as the
exchange, however to
keep the competitive threat present at both levels and UBS allows people to pick
up backhaul traffic between
the two.
what we stopped short of doing was unbundling any fiber that might go, for
example, if the cabinet is close to a series of homes that
it might be economic
to run fiber from the cabinet to the home. we haven't unbundled that fiber
because we believe that would have
had a chilling investment affect at that
point. Rivals are having pretty full access to Telecom's fiber unless Telecom
outs fiber
out beyond the cabinet. The fiber access stops at the cabinet.
what's the main reason for requiring the accounting separation?
the information disclosure operates both at the product level and at the
business unit level. they operate at the product level to
ensure that there
isn't cross subsidisation or discriminatory behavior or excessive returns being
made on a product-by-product basis.
Accounting separation also operates at the
business unit level as between retail and wholesale so that regulators can drill
in to
the accounts and see the relative performance of both.
They are actually quite different businesses. The wholesale business is a
stable, relatively low- risk network business much more
akin to an electricity
distribution line. The retail business is a high-risk multi-product,
fast-innovating, fast life-cycle, consumer-based
business where one would expect
to earn higher returns to compensate for the risk involved. The dynamics of the
two are quite different.
Experience overseas suggests that companies do better when they unmask those
different business drivers and we think that accounting
separation while it
might be a little complex initially will' actually not be a bad thing for
Telecom. It will help to unmask those
drivers and it will assist the regulator
to make sure that there isn't again cross subsidization or discrimination
between, say,
the wholesale business and the retail business vis-a-vis retail
competitors.
The ultimate objective is for a non-discriminatory, fair wholesale market.
There is a secondary objective,which is a signaling mechanism
vis-a-vis
structural separation. We are starting the work now on accounting separation
which presumably would make structural separation
easier to do later if
necessary.
some might interpret that as a gesture of seriousness on our part that we
haven't foreclosed a structural option should it become
necessary at some later
point. Although I would like to repeat, and it's quite important, that the
government doesn't have a view
one way or the other on that question at this
time.
When do you think the first lines will be unbundled?
I don't know exactly but I believe there are entrants buying DSLAMs as we
speak.
so when will we see it on the street?
There is a process that needs to be gone through. It's important that both
analysts and consumers understand it. we are in the process
now of drafting
legislation , we have said that we plan to introduce that around the middle of
the year, we can't be exact on the
date, and it will take I imagine the balance
of the year; to get that through Parliament.
we have a solid majority behind it so theres no real .chance it won't go
through. Indeed, the National Party is.supporting it to select
committee and I
hope that that support will continue right throughout. I think that that would
be the sensible thing for the main
opposition party to do. The ACT party said it
will oppose but one kind of expects that to be the case so it's neither here nor
there
really.
Then the commission, once the bill is enacted, needs to set up the processes
and procedures and policies that allow it to, for example,
implement accounting
separation. They need to spell out in more detail how they want that to work. I
imagine that they will start
thinking about it concurrently but I would be
expecting that work to take probably most of first half of next year, maybe
longer.
we would expect to see some of the affects of unbundling in the market from
probably late 2007, early 2008. But later in 2008 pretty
much the full affect.
UBS will be available quicker and we will be watching very closely to see the
performance of the wholesale
market as it goes through.
Is there a single thing that you think has held New Zealand back in
broadband, is there one or two single factors?
Two single factors. Inadequate competitive conditions on the local loop and
barriers to entry on intermodal competition.
Have you got an idea of what sort of speed is acceptable, what you want to
see in the New Zealand market?
I'm afraid that's a how-long-is-a-piece-of-string kind of question. what we
can be sure of is whatever speeds we think of today will
seem obsolete by
tomorrow. when we wrote the Digital Strategy in May last year we were advocating
a baseline by 2010 5mbps and that
already looks conservative a year later. I
don't think it's appropriate for me in such a dynamic environment to name a
number. But
we will want to continuously benchmark it against our OECD
peers.
what about prices? How much do they have to come down?
That's another interesting question. I'm not the commissioner and that's a
question which the commissioner must decide. I note market
comment that
broadband could easily be available for NZ$10, NZ$ 12 a month, NZ$15 a month i
.e. from a half to a third what it is,now
at entry level. What you will see is
at the top end with higher speeds probably some of the same kind of prices for
small business
users and advanced residential users but with much much better
packages available for the same kind of money. I imagine the market
will segment
a bit more and that you will see low-cost offerings for those that are very
price-sensitive consumers and that you will
see much fuller , faster speeds for
higher levels of service for those who are less price sensitive.
That NZ$10 a month level, do you agree with that?
The faster, the cheaper, the better, The economists would say that provided
that prices,don't fall below the long-run marginal cost
of sustainable
investment, otherwise it would be temporary.
Can I say that you think NZ$10 a month is a good idea?
I haven't done the analysis on that. I'm noting that there's speculation in
the market that that would be a sustainable price point.
I'm noting that to the
extent that an anyone in the government starts naming-prices: that would be the
role of the commissioner not
the minister.
At the speech to ICANN, you commented that there were some innovative
businesses that hadn't been able to get off the ground or do
what they wanted to
do are there any that I can name drop? It's good to have real examples behind an
anecdote.
There are many names I could name. I'm reluctant to give you their names
without asking them first. If that's really important to
you we could probably
ask some people and get back to you. But let me give you some examples by type.
Auckland-based online content
producer trying to ship lots of high-density
graphics content to the U.S. either having to put it on discs and put people on
aircraft
or wait till cruise liners came in to Auckland harbour so they could
take advantage of the satellite uplinks off the cruise liners.
These are not good stories. A major developing software business saying that
their rate of growth has been directly constrained by
the shortage of affordable
broadband. And it's a very high-growth, high-potential company. Another one
sadly which said our broadband
environment was a reason for a decision to
relocate offshore.
Many New Zealanders offshore have e-mailed me to say how embarrassed they are
when others talk about the broadband availability in
their home country, and
sneer and laugh at New Zealand for the paucity of our environment.
One cap see that outside the specific numbers and the factual business
examples, this has a whole look and feel to it of New Zealand
being a kind of
banana republic, to quote Paul Keating, or a backwater of cyberspace which it
should not be. It's not that hard-to
provide world standard Internet in New
Zealand and we are an innovative people who have every reason to want to take
advantage of
that environment.
I am really passionate about New zealand moving forward. I'm passionate about
the economic development challenge facing New Zealanders
and in our generation
we will have to meet that challenge or arguably cease to exist as an independent
country.
Have you got any personal examples of how you have been hindered by slow
broadband or prices, you or your family?
I never kind of mix business with family. I don't think it would be fair to
give examples of how long it might have taken me to get
broadband hooked up at
home.
Are you happy to say which company you use at home?
I use Jetstream for my home broadband, which is provided through ministerial
services, .and I use vodafone for my mobile so I try
to be fair to the various
parties.
The last question is just how important is this whole thing for you
personally, for your career, it's a pretty major thing?
You have to ask others-what they think of that. I'm just trying to call it as
I see it. I'm trying to do a good job for New Zealand.
This has been an
important piece of work. It's taken six months, very pleased to have it out in
the market, and of course we have
got another year's worth of implementation
probably ahead of us. And you have my commitment to that being done as
expeditiously and
professionally as possible.
Anything else you want to add that we haven't covered that you think is
crucial and I've missed?
No, I don't think so. I think you've been very well researched and you have
covered the ground pretty well. Just one thing, there
has been some discussion
in the media about the manner in which this had to be put in the public domain
and whether the timing had
anything to do with the share price performance. I
think I should reassure investors that the package as announced was not one word
different than it would have been on budget day, partly because all budget
material has to be drafted well in advance. so to that
extent I doubt that it
would have made any difference at all.
***End of transcript***
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17/2006 03:40 GMT
APPENDIX G
Market data graph - May 16 2006
NZSX Price/Volume activity in TEL on 16 May 3006
View enlarged image
ASX Price/Volume activity in TEL on 16 May 3006
View enlarged image
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