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Sharebroker rejects claim NZX committed $100m to grain exchange

Witness evidence has begun on the fifth day of the scheduled nine-week court action in which NZX and Ralec.

Sophie Boot
Fri, 06 May 2016

NZX director and Forsyth Barr managing director Neil Paviour-Smith has rejected Ralec's claims in the High Court that the stock exchange operator committed $100 million to its 2009 investment in the Clear Grain Exchange.

Witness evidence has begun on the fifth day of the scheduled nine-week court action in which NZX and Ralec, the grain exchange's previous owner, are suing one another for up to A$37.6 million and A$14 million plus bonuses respectively.

Mr Paviour-Smith, who was appointed an NZX director in 2002 and has sat on the stockmarket operator's audit and risk committee since 2006, was the first witness to give evidence, in which he denied Ralec's claim in its opening submissions that NZX had starved the Australian grain trading platform of development funds, despite making a $100 million commitment to it at purchase.

Tim North, Ralec's QC, pushed Mr Paviour-Smith over the alleged $100 million commitment to developing an 'agri-portal' following the purchase of Clear.

Cashflow commitments
In his statement, Mr Paviour-Smith said NZX management expected the cost of acquiring Clear could mean a cashflow commitment of $20-30 million, and further international development would require an extra $50-60 million, meaning a total of up to $100 million.

While there was a commitment in principle to the strategy of developing the portal, it was not a financial commitment of $100 million, he said, under repeated questioning from Mr North on how "commitment" could be interpreted.

"In this context, a commitment to a strategy is quite different to a commitment to spend money," Mr Paviour-Smith said.

"At no time did the words 'commitment to capital investment' mean we had signed off on a $100 million capital allocation. If that was the case, it would be in our accounts and there would be funding plans and all sorts of things. We affirmed a direction for the business and what that could look like. It was a commitment to trying to make that happen."

Targets not met
Mr Paviour-Smith also described Clear's failure to meet three targets for the first earnout payment to Ralec. The initial target was trading of 1.5 million tons by June 30, 2010, with further targets of 3 million tons by June 2011 or 4.5 million tons by June 2012. The second target was based on the successful delivery of the agri-portal.

"Clear had fallen well short of the targets required for this payout to be earned, with volumes respectively of only 14%, 13% and 17% of the annual seasonal targets specified in the SPA [sale and purchase agreement]," he said.

Mr North also asked about the board's reliance on information provided by Ralec. Ralec has argued the NZX board never considered predictions made by Clear before its acquisition.

Due diligence reports
Mr  Paviour-Smith said the board knew the due diligence reports it was presented with were the result of interaction between NZX management and Clear.

"It becomes obvious to anyone reading a due diligence report that there has been a very heavy level of interaction," he said.

"It was very obvious to all of us that management had spent a lot of time with the Ralec folks in order to form views about all the things you would normally expect. A due diligence report is not a desktop exercise.

"They spent an extensive amount of time in the business. The board knows this is being produced after extensive engagement with the business people."

The case, which is continuing and  pre-dates much of NZX's existing management, having first hit the courts in 2011.


Sophie Boot
Fri, 06 May 2016
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Sharebroker rejects claim NZX committed $100m to grain exchange