Milford demands NZX action on Xero delisting

Milford Asset Management fund manager Brian Gaynor said “We don’t agree that the NZX should make important decisions on behalf of shareholders."

Milford forced to sell Xero at a loss, says portfolio manager Sam Tretheway.

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Fund manager Milford Asset Management has written to the NZX demanding it requires software company Xero to hold a shareholder vote before delisting or buy back its stock at $34.05.

Xero stunned the market on November 9 with an announcement it would delist from the NZX in February and consolidate its share trading on the ASX.

Milford director Brian Gaynor was among those shocked by the move, describing it at the time as a “dreadful decision.”

The fund manager has followed up today with a letter from Mr Gaynor and portfolio manager Sam Trethewey to NZX head of market supervision Joost van Amelsfort, asking the exchange to invoke listing rules requiring a Xero shareholder vote.

“Milford’s NZ Equities Wholesale Fund has been severely prejudiced by the delisting decision as it will be forced to sell a large percentage of its Xero shares because of the fund’s mandate to hold NZX listed companies and its NZX50 Gross Index benchmark,” they said.

Milford said its funds hold 584,037 Xero shares, of which the Wholesale Fund holds 339,445 shares – equivalent to 3.75% of the fund’s $293 million value.

Under the listing rules the NZX is entitled to impose conditions on a company’s delisting, including a requirement to hold a shareholder vote and “arrangements to protect the rights of [shareholders] … which, if lost on cessation of listing, would prejudice the position of those holders.”

Milford said it believed the negative performance of Xero shares, of minus 7% since the announcement, was mainly caused by the delisting announcement, further prejudicing their funds.

The fund manager had invested in Xero because it was listed on the NZX and its directors had agreed to be bound by NZX listing rules, Milford said.

“We don’t agree that the NZX should make important decisions on behalf of shareholders and exempt Xero from requiring shareholder approval to delist from the NZX. We don’t believe the NZX has the right to decide whether shareholders have been prejudiced by a delisting decision.”  

Milford said it believed its funds were further prejudiced if the NZX’s decision to waive the need for a shareholder vote reduced investor confidence it would fully protect investor rights.

In addition, “The Xero decision could encourage other New Zealand companies to list on the ASX or move from the NZX to the ASX. This would reduce the number of domestic investment opportunities for Milford’s NZ Equities Wholesale Fund and Milford’s other funds.”

Milford said an alternative to requiring a shareholder vote would be to require Xero to buy back stock from affected shareholders at $34.05 a share, which was the market price immediately before the delisting announcement.

Xero shares last traded at $31.07, valuing Xero at $4.3 billion.

RELATED VIDEO: Xero CEO Rod Drury explains why his company is delisting from NZX (Nov 10)


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Just sell them to another Milford fund.

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They are different legal entities mate - scary as a fund manager you can make comments as naive as that

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Agree incredibly naive comment, and raises questions in my mind about related party transactions within his own fund if he thinks that is a realistic option.

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Perhaps Lance was tongue in cheek, referring to the manipulation allegations that affected Milford some time back

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1: Milford's NZX fund has to sell the shares come April 1, when the NZX listing goes away.
2: They won't be alone - there will be a lot of shares tied up in NZX-50 tracking funds that will need to be cleared out.
3: At some stage, but not simultaneously - probably later, there will be a lot of ASX-200 tracking funds that will need to buy Xero shares.
4: So buying those unwanted shares from the NZX and holding until the ASX 200 kicks in may not be a silly thing to do for some traders. This is the sort of thing that, perhaps, their wholesale funds could do, depending on their mandate and if one of those funds, sees that the price per share is good, as Gaynor seems to be inferring.
5: And yes - all Milford orders should go through a central trading desk (with firewall protections) and not between funds.
6: I'd be pissed off too if I were an NZX-50 tracking fund as one of their best performing stocks will drop out, and the replacement may be a much slower moving company.
7: However a proper index fund strategy is across multiple markets, and an NZX-50 index fund holding should be as part of a wider portfolio including ASX and, more importantly, US, SE Asia, European indexes along with other smaller international indexes.

While I have not been a manager of a fund running listed assets*, we do have very strong conflict management policies and approaches, managed by our Board. And we use them.

*Until yesterday. Punakaiki Fund now owns a few million shares in an ASX listed company as a result of an exit from one of our investments.

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Wow, just wow.

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Seems you are not allowed to make a joke, Lance. How did anyone take this comment seriously.

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Xero and it’s Board should remember they work FOR shareholders and serve at their pleasure - not the other way around . To give your shareholders the FU like this is as unprecedented as it is arrogant

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Couldn't agree more. While I don't necessarily agree with everything Gaynor has to say at least Milford is standing up for its unitholders.

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Technically that’s not true. The directors and the board are instructed to work in the best interests of the company, not necessarily always in the best interests of the shareholder, and definitely not in the best interests of one shareholder.

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Being a shareholder, I fully support this decision and it makes total sense!

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Read the headline and thought Brian should just get over it, but reading the rest of the article I think the NZX has no option but to force a vote, even if it is unlikely to prevent the shift.

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If NZX use their powers to force a vote Gaynor will only whinge that NZX are abusing their powers to keep Issuers on the market so it doesn't look bad.

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nzx cant even follow there own rules by the look of things, what a shambles.

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Given his funds' requirement to hold NZX & NZX50, Gaynor has a valid gripe here. It's the shareholders who own the company, not the board who have unilaterally made such an important system. There should most certainly be a shareholder vote when so much is at stake for some shareholders (and perhaps an offer to buy out the funds that are caught in a legal net).

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Really pretty short-sighted from Gaynor.

Lets say NZX insist on a vote and shareholders refuse to let Xero delist. This will cause every potential listing company to question whether listing on the NZX is the right thing to do. Hardly positive for the market you claim to be solely focussed on investing.

The real issue is the inflexibility of the mandate for their fund to own ASX stock... If that really is the issue. Wasn't this the same fund that owned 50% of the unlisted Complectus..... not NZX or ASX listed?

Anyway...why should NZX listen Brian?... bear in mind this particular fund owns 0.25% of total Xero stock on issue. Please, someone take away this man's soapbox.

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No, I do think he makes a point in the age of ETF's. I was looking at the marketing of a NZ firm who sells ETFs last week (advertised on NZX's site!). How many passive index tracking funds are there around NZX/50? They will all be adversely affected as forced to sell at same time.

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Obviously not enough passive ETF's to convince Xero the sellers of NZX-listed stock would outweigh the gain of being in the broader ASX index.

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And that is my point. Xero was thinking about the board (and perhaps the value of their shareholdings): they were not thinking about some important number of their shareholders. ETFs are a big trade now: in the US it's coming up to 50/50 between ETF index tracking passive funds, and active funds. I don't know what the figure is here, but regardless, obviously Xero hadn't considered this (thus, again, their shareholders).

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One of the many reasons I do not invest on the NZX - too small a market that is too easily manipulated and run with a wild west sort of attitude.

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Anyone want to explain/speculate what happens to shareholders upon delisting. do you have to sell prior, what if you dont? DO you get paid out and if so at what price?

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Thanks for your comment. Xero has provided some information for shareholders on that. It's available on the NZX here. In short, the holdings of NZ shareholders will be unchanged. It's just that trading will have to occur through the ASX, which requires some different administration.

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So if you dont like it you sell out locally prior?

Anyone got a comment on probable tax implications for mom and pop types leaving aside FX? ie Does this change where the company is domiciled etc or is all this redundant by tax agreement with OZ anyway?

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Thanks for your comment. My understanding is that there are no tax implications for NZ shareholders. The company will remain domiciled in NZ and does not pay dividends.

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HELD - CK

I bet Gaynor is happy on another front - that at least Sir Ralph Norris in the end did not buy in to Milford !

Despite the DD by Norris, the agreement to buy in, then the "oh no thanks" by Norris - blaming all sorts of issues, the Xero issue is just a bump in the road!

Imagine the Chair of NZs worst building company being a part of Milford!!!

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The comments above show that the understanding of good governance principles in NZ is the depth of a puddle.

Companies are democratic organsiations NOT dictatorships.

Regardless of how a vote might go the good governance principle is that EVERY shareholder must have the opportunity to vote on significant matters.

Alas many Directors do not share ( pun intended) this view and regard 'their" company as "their" personal fiefdom.

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Agree in principle.. and would have thought that a decision like this should be discussed or floated and an AGM. That said, if enough shareholders agree (10%?) I believe they can call for an EGM to discuss and vote on the issue.

Perhaps most shareholders do not have such a restrictive mandate as Mr Gaynor and can continue to be shareholders and as such are ambivalent as to which exchange it is listed.

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