Briefcase: The Diligence of the modern director

Definition of diligent: adjective, having or showing care and conscientiousness in one’s work or duties.
Like any good director, leading commercial lawyer Buddle Findlay partner Mark Russell must be studying this Oxford Dictionary definition as much as studying the securities regulatory rules as he and the directors face yet another challenging time over the latest twist of fate befalling Diligent Board Services, the stockmarket darling.

External lawyers brought in to consider regulatory matters relating to Diligent’s issuing of stock options beyond the allowable cap are an embarrassment to the company but also to the lawyers; more so given it was external lawyers who pointed out the gaffe.

Mr Russell, a director since the company floated, is described on his firm profile as having legal expertise “with particular emphasis on Listing Rules compliance advice, initial listing and public offerings”.

His experience is undoubted. But the further fall from regulatory grace for the company is one he would surely prefer did not occur on his watch.  (See more at LawFuel.)
And what a float it was
Diligent had a baptism of fire in 2007, with the NBR announcing the background of founder Brian Henry’s brother Gerald, who had transgressed to the point where he served four years’ jail in the US afer the collapse of his company Energycorp and its rather murky offspring, Epicorp. 

Brian Henry was involved in the same company with his brother and was bankrupted following its failure.

(This is not the Brian Henry of Goldman Henry Capital Management - Editor).

None of the above affects Brian Henry’s deserved kudos for building a highly successful company such as Diligent and which is needed these days by both the NZX and the country as a whole about as much as the discovery of a Saudi-sized oil field outside of the conservation domain.

For some reason, the directors did not consider the details relating to the Henrys to be sufficient to warrant making public at the time of the float.

The directors would certainly have been aware of the Henrys’ background as Mark Russell was involved not only in the winding up of Energycorp but was also professionally involved with BNZ, which lent more than $15 million to Energycorp, a company that involved a woodburner invented by the Henrys’ father and in which John Spencer, via his then financial adviser Steve Trott, invested heavily. 

Mr Russell also interviewed Brian Henry before acting for Diligent and served on the due diligence team prior to listing. 

Energycorp listed at the tail end of the boom days and was one of the first of the first to crash. I recall a meeting involving the Henrys, who had an investment from another first-to-fail company, Chambard Property Developments, which was run by Wellington property developer Philip Stratford, formerly of Renouf Properties. 

The meeting ended on a bright sunny Wellington day, rather like these summer days, which I trust does not foreshadow further doom. I glimpsed the Henrys’ aircraft of choice, a rented Lear, banking to port in the blue-lit sky as they headed back to Auckland. 

It was the same jet that subsequently took a fleeing Gerald Henry to the States and to jail.

More recent times
Diligent has been an outstanding success until its latest stumble, this time in respect of its stock option plan in favour of the chief executive Alessandro Sodi and which has been found to fall foul of listing requirements by exceeding the cap by a total of 3.75 million shares. 

The company recruited the US law firm Goodwin Procter as well as Minter Ellison locally to thoroughly review and analyse the stock options issued over the relevant period, which included plans implemented in 2007 and 2010.

The appointed Special Committee cancelled the options awarded and also reviewed Diligent’s compliance with regulations since listing on the NZX.

The committee reported: “ ...a number of instances where it appears that Diligent has not, or may not have been, in compliance with its New Zealand statutory obligations”.  The report refers specifically to the options granted to employees in New Zealand without a prospectus.

Although it was noted that the instances of non-compliances were inadvertent and due in part to what the committee calls the “constrained resources” of the company as well as “complex regulatory and compliance obligations across multiple jurisdictions with differing regulations and requirements”, it nevertheless must leave the directors, including such an acknowledged and experienced securities and regulatory law expert as Mr Russell, feeling uncomfortable, to say the least.

Following the previous departures of Brian Henry and Peter Huljich from the Diligent boardroom, the directors must be looking at one another with that “whose next?” look. 

Stratford’s return
You can therefore imagine my surprise this week to find none other than Philip Stratford, the former Chambard boss, in my office foyer requesting some assistance with regard to a matter that occurred before his last bankruptcy.

Burning with inner fury and displaying his usual quiet but spirited manner, he plans on legal steps to remedy past injustices.  
John Bowie is publisher of LawFuel

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