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Report of the Securities Commission on Aspects of the Affairs of Max Resources Limited

(In Statutory Management)

Volume 1

January 2000

Substantial Security Holder Disclosure and Directors' Conduct
in Transactions of
Max Resources Limited
(in Statutory Management)
in 1996, 1997 and 1998

  1. Introduction
  2. Background
  3. Executive Summary of Volume 1
  4. Issues Considered in Volume 1
  5. Disclosure of Relevant Interests in Max's Listed Securities
  6. Conduct of Max's Directors in Relation to Transactions Entered Into by Max in 1996/1997
  7. Referrals

    Glossary of Terms Used in Our Report

    Appendices

    Volume Two - Financial Statements

 

1		 INTRODUCTION
 
1.1 Max Resources Limited (in Statutory Management) ("Max" or "the Company") is a New Zealand public listed company with its registered office at Tauranga. Max is also registered as an overseas company in Australia under the same name and, until recently, had its principal operating office in West Leederville, Perth, Western Australia
 
1.2 On 23 March 1998, the Market Surveillance Panel ("Panel") of the New Zealand Stock Exchange ("NZSE") suspended the quotation of Max's listed securities.
 
1.3 On 31 August 1998, by an Order in Council pursuant to section 38 of the Corporations (Investigation and Management) Act 1989, on the recommendation of the Securities Commission ("the Commission"), Max was declared subject to statutory management with effect from that date.
 
1.4 It is one of the Commission's functions under section 10 (c) of the Securities Act 1978 ("Act") to "keep under review practices relating to securities, and to comment thereon to any appropriate body". The purpose of this report is to publish, for the benefit of the shareholders of Max and any other appropriate body, the Commission's comments on aspects of the affairs of Max during the period 1996 to early 1998 and subsequent related events.
 
1.5 This report contains the Commission's observations on aspects of Max's affairs. The report has been based on documents made available to the Commission and on submissions from parties to whom confidential consultative draft reports were distributed for comment. The Commission took careful account of all information and comments received.
 
1.6 The report is prepared in two volumes -
Volume 1 - Substantial Security Holder Disclosure and Directors' Conduct in Transactions of the Company

Volume 2 - Financial Statements

This is Volume 1 of the report.
 
1.7 The report has been prepared by a quorum of Members of the Commission comprising:
Mr E H Abernethy, Chairman
Mr F R S Clouston, Member
Ms E M Hickey, Member
 
1.8 When referring to persons in our report we use the customary honorific the first time a person's name is mentioned. Subsequently we may use the surname only. No disrespect is intended by this practice.
 
1.9 For the purposes of our report we obtained or reviewed a number of documents related to the affairs of Max, including:

  1. Affidavit evidence filed in support of, and opposing, a winding up application and motion to appoint a provisional liquidator to the Company, filed in the Federal Court of Australia, Western Australian District, in March 1998 including, but not limited to:

    1. affidavits of Mr Robert Ivan Owen McShane sworn on 18 March 1998 and 6 April 1998 together with supporting documents (some 260 pages) which included a report of the Company's operations from Horwath, Chartered Accountants, of Perth, ("the Horwath report") requested by McShane and Mr Thomas William Johnson in their capacity as the Audit Committee of directors of Max;
    2. affidavit of Johnson sworn on 18 March 1998;
    3. affidavits of Mr Michael James Langoulant sworn on 24 March 1998, 30 March 1998, 2 April 1998, 7 April 1998 and 15 April 1998;
    4. affidavits of Mr Josephus Jeffery Verheggen ("Jeff Verheggen") sworn on 24 March 1998 and 2 April 1998;
    5. affidavits of Mr Peter Briggs sworn on 24 March 1998 and 2 April 1998;
    6. affidavit of Mr Jeffrey Laurence Herbert, chartered accountant, of PBB Ashton Read, Perth, sworn on 1 April 1998, including a report he had prepared on the solvency of Max at the request of Jeff Verheggen and Langoulant for the purposes of the hearing;

  2. Sinclair & Wood's audit file relating to the audit of Max's financial statements for the year ended 30 June 1997;
  3. papers received under summons relating to an investigation into the affairs of Max carried out for two of the directors, McShane and Johnson, by an Australian private investigator, McLernon Group Limited;
  4. papers of the Company held in New Zealand by the statutory managers;
  5. written submissions from a number of affected parties in response to versions of the report circulated to those parties in May, October and November 1999.

2
 BACKGROUND

Max - Incorporation and Nature of Business
 
2.1 Max is a New Zealand public listed company. It was incorporated in New Zealand on 8 October 1987 with its registered office at the offices of Sinclair & Wood, chartered accountants, 510 Cameron Road, Tauranga. Max has been principally operated from West Leederville, Perth, Western Australia and is registered as an overseas company in Australia under the same name.
 
2.2 The directors of Max during the period from 1996 to early 1998 (at varying times) were Jeff Verheggen, Langoulant, Johnson, McShane, Mr Josephus Theodorus Herbertus Verheggen ("Verheggen Snr") and Briggs. Mr Edmund Czechowski, an Australian businessman, was subsequently appointed to the board of directors. Langoulant and McShane were also joint Company Secretaries.
 
2.3 Until 1997 Max's principal business was described in the Company's annual reports as being "mineral operations and exploration and direct investment in other resource based companies". In July 1995, Max, through its wholly-owned subsidiary Robregal Investments Limited ("Robregal"), acquired approximately 29% of the shares in Australian listed mining exploration company, Intrepid Mining Corporation NL ("Intrepid"). Intrepid had a major tenement holding in the second largest gold province in Victoria - Walhalla Woods Point. In addition, Max also held interests in joint venture agreements for mining tenements in the Norseman Dundas North province ("the Norseman Venture") and Leonora, both in Western Australia, and the Bay of Plenty, New Zealand.
 
2.4 In May 1997, at an Extraordinary General Meeting of the members of Max held in Auckland, it was resolved to change the principal business of Max to the manufacture and distribution of organic fertilizer ("Waste Recovery Systems" or "WRS") and to divest the company of all investments in the resource sector.
 
2.5 Prior to or around the time of the May 1997 meeting, Max acquired various assets of WRS Pacific Pty Limited ("WRS Pacific"), a company controlled by Briggs. These assets consisted of organic fertilizer production facilities in Indonesia, India, Sri Lanka and the USA and associated intellectual property.
 
2.6 By this time, Max had already agreed to acquire a right to an 87% interest in Amendements et Fertilisants D'Amorique SA ("AFA"), a French company engaged in a joint venture for the construction of an organic fertilizer plant in France. Max acquired its interest in AFA by agreeing to acquire the issued shares of a company called WRS Europe Limited ("WRS Europe"), which was to directly hold 87% of the shares in AFA. Jeff Verheggen and Verheggen Snr held all the shares in WRS Europe.
2.7 In the period 30 June to October 1997 Max entered into agreements under which:
  1. Max sold its interest in the Norseman Venture to Australasian Gold Mines NL ("AusGM"), one half in return for 5 million fully paid shares in AusGM, and the other half for A$2 million, which was only payable upon a positive feasibility study being completed for the project and provided the transaction was completed by June 1999;

  2. Max acquired an additional, minority interest in the Norseman Venture from its partner in the project, Darkdale Pty Limited, for A$1.1million and then onsold that interest to AusGM in exchange for 3.75 million fully paid shares in AusGM
2.8 In October 1997 Max (through Robregal) sold its interest in Intrepid to three entities - Village Lake Pty Limited, Garland Investments Limited and Wah Fung International Limited. According to Max's 1997 Annual Report, Max sold this interest for a total consideration of A$2.4 million, an amount described in the financial statements as being "... above the June 1997 book value.." and "... having exceeded the original cost of the investment by A$1,000,000".
2.9 In March 1998 McShane and Johnson applied to the Australian Federal Court for an order that Max be wound up pursuant to the Australian Corporations Law and for the appointment of a provisional liquidator. In support of the application McShane and Johnson commissioned Horwath, Perth Chartered Accountants, to review Max's financial statements and affairs, and a private investigation firm, McLernon Group Limited, to investigate certain transactions of the Company and its substantial shareholders.
 
2.10 The Federal Court proceedings were contested by the Australian directors and former directors. The action was subsequently withdrawn when McShane, Johnson, and McLernon Group entered into a deed of settlement on 22 May 1998 with Jeff Verheggen, Briggs, Langoulant, Johnson's wife (who was a creditor of Max) and Max.
 
2.11 On 23 March 1998 the Market Surveillance Panel of the NZSE suspended the quotation of Max shares following the application by McShane and Johnson to the Australian Federal Court.
2.12 On 31 August 1998, by an Order in Council pursuant to section 38 of the Corporations (Investigation and Management) Act 1989, Max was declared subject to statutory management with effect from that date.

Max's financial position
 
2.13 Max's audited consolidated statement of financial position as at 30 June 1997, as set out in the company's 1997 Annual Report, showed that Max had a share capital of NZ$10,602,124, reserves of NZ$8,254,626 and accumulated losses of NZ$6,062,535, giving a total shareholders' equity/net assets of NZ$12,794,215.
 
2.14 The statutory managers reported to shareholders on 2 March 1999. Their report contained an unaudited management consolidated balance sheet as at 31 October 1998. This balance sheet showed Max with share capital of NZ$10,634,000, reserves of NZ$1,145,000 and accumulated losses of NZ$8,211,000, leaving total shareholders equity/net assets at NZ$3,568,000. The statutory managers' report, however, stated that the statutory managers had reservations about the book values of the assets disclosed in the unaudited balance sheet and that, in their view, the realistic value of Max's assets could be less than its liabilities.
2.15 The Commission reviewed Max's 1997 financial statements and the circumstances in which they were prepared. The Commission's comments are contained in Volume 2 of this Report.

Directors of Max
 
2.16 From October 1994 to 4 January 1998, Max had two Australian directors, Jeff Verheggen and Langoulant, and two New Zealand directors, Johnson and McShane. Jeff Verheggen and Langoulant reside in Perth and were executive directors of Max. Johnson and McShane reside in New Zealand and were non-executive directors. Johnson and McShane have advised us that Perth solicitors, Clayton Utz, initially approached them to act as independent directors of Max. Clayton Utz had acted for Restech International Ltd, a company McShane and Johnson had been directors of for a period of eight years.
 
2.17 On 4 January 1998 Jeff Verheggen resigned as a director of Max. Verheggen Snr, Jeff Verheggen's father, replaced him on the board. Around the same time, Briggs was appointed to the board of Max.
 
2.18 On 1 June 1998 the NZSE was advised that McShane and Johnson had resigned as directors of Max. On 19 June 1998 the NZSE was advised that Langoulant and Verheggen Snr had also resigned from the board. We understand that Briggs and his business associate, Czechowski, are presently the only directors of the Company. We understand that Briggs had been operating the Company from his offices at 26 Colin Street, West Perth until the appointment of the statutory managers in August 1998.

Shareholdings in Max
 
2.19 Although presently suspended, Max's shares are listed on the NZSE. Max's 1997 Annual Report stated that, as at 30 October 1997, the Company had on issue:

  • 39,147,499 ordinary fully paid 25¢ shares
  • 22,967,725 options to acquire fully paid 25¢ shares on or before 31 July 1999. The options carried no voting rights.
2.20 According to the 1997 Annual Report, the 20 largest shareholders of the company, as at 30 October 1997, were:

SBC Warburg NZ 7,553,400
NZ Central Securities Depository 4,434,286
Gybson Pty Ltd 3,000,000
Hendry Nominees Ltd a/c 486 2,794,815
Forbar Nominees Ltd 2,567,900
Hampton Snow Ltd 2,135,000
Interbac Australasia Pty Ltd 2,000,000
RJ Peters Pty Ltd 1,725,000
Palliser Nominees Ltd 1,171,100
Portfolio Custodian Limited 1,050,000
Fidelity Mutual Funds Management Inc 928,572
Zurich Capital Management 785,715
AJ Cartwright 750,076
Hendry Nominees Ltd a/c 263 681,143
John Cartwright & Co Pty Ltd 600,000
Salim Cassim 542,858
Wilbur Nominees Ltd 511,700
Adubos Company Ltd 500,000
PT Eltro Machino 500,000
Isseka Ltd 400,000
Total 34,631,565

Shareholder distribution
 
2.21 We have been advised by Computershare Registry Services Limited that, as at 13 January 1999, there were 625 shareholders in Max. The geographical distribution of shareholders was as follows:

Country

 Number of holders

 Quantity

 %
Australia 114 14,270,726 36.45
Canada 1 572 0.00
Germany 1 500 0.00
Great Britain 8 1,687,460 4.31
Hong Kong 2 542,858 1.39
Channel Islands 1 2,135,000 5.45
Indonesia 3 6,310,000 16.12
Ireland 1 785,715 2.01
Malaysia 2 545,144 1.39
New Zealand 492 12,869,524 32.87
Total 625 39,147,499 100.00
 
2.22 On the basis of the above analysis, it appears that the majority of Max's small shareholders, as at 13 January 1999, were New Zealand residents.

Suspension of the quotation of Max's listed securities
 
2.23 On 23 March 1998, as noted above (see para 2.11) the Panel of the NZSE suspended the quotation of Max's listed securities following the application by New Zealand directors Johnson and McShane to the Australian Federal Court to have a provisional liquidator appointed with power under the Australian Corporations Law to review transactions recently entered into by Max and the payment of Max's creditors. The basis for the Panel's suspension order were the conflicting reports received by the NZSE from Max's New Zealand and Australian directors concerning the Company's affairs. There was also uncertainty as to whether Max had been complying with the NZSE Listing Rules concerning the issuing of relevant information about the Company's activities, including the change in the principal business of the Company.

3

EXECUTIVE SUMMARY OF VOLUME 1
 
3.1 This volume of the report considers aspects of the affairs of Max in the period 1996 to early 1998, in particular, the disclosure of substantial security holdings in Max and the conduct of Max's directors during this period.
 
3.2 The directors of Max during this period (at varying times) were Jeff Verheggen, Langoulant, Johnson, McShane, Verheggen Snr and Briggs. Czechowski, an Australian businessman, was subsequently appointed to the board of directors. Langoulant and McShane were also joint Company Secretaries.
 
3.3 The report considers the following issues:

  1. Was there significant non-compliance with the requirements of Part II of the Securities Amendment Act 1988 ("the Amendment Act") in respect of the disclosure of relevant interests in Max's listed securities? In particular, was there significant non-compliance with these requirements by any of the directors of Max, or any persons associated with them?

  2. Did Max's directors, in procuring Max to enter into certain transactions in 1996 and 1997, have proper regard to their duties to the Company and the interests of Max's shareholders and creditors, in particular:

    1. the duty to act in good faith and in what they believe to be the best interests of the Company; and

    2. the duty to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances?

Disclosure of Relevant Interests in the Listed Securities of Max
 
3.4 Under Part II of the Amendment Act, every person who becomes a substantial security holder in a public issuer is required to give notice of that fact (in the prescribed form) to the NZSE and the public issuer. The Amendment Act defines a "substantial security holder" as a person who has a "relevant interest" in 5% or more of the voting securities of the public issuer. The notice must be given as soon as the person knows, or ought to know, that the person is a substantial security holder. "Relevant interest" is widely defined and includes any form of beneficial ownership, the power to acquire or dispose of the securities, the power to control the acquisition or disposition of the securities, the power to exercise the voting rights or the power to control the exercise of the voting rights of the securities.
3.5 The disclosure provisions of the Amendment Act also apply when a substantial security holder changes its holdings by each 1% or more of the voting securities of the issuer.
 
3.6 The Amendment Act provides that, where there are reasonable grounds to suspect that a substantial security holder has not complied with the Act, the High Court may, on application, make a number of orders relating to the issuer, the substantial security holder and the securities, including orders directing forfeiture of securities. Appendix A to this report sets out the relevant definitions from the Amendment Act.
 
3.7 As at 30 October 1997, Max had on issue:

  • 39,147,499 ordinary fully paid 25 cent shares

  • 22,967,725 options to acquire fully paid 25 cent shares on or before 31 July 1999. The options carried no voting rights.
 
3.8 We believe there are reasonable grounds to suspect that Briggs, during 1997 and subsequently, had a relevant interest in 4,500,000 Max shares (11.49% of the voting securities of Max) held by various companies owned by him. Briggs has subsequently acknowledged he has an interest in some of these shares. Briggs did not disclose any of these interests to the NZSE or the Company as required by Part II of the Amendment Act. The Company did not publish information about these interests in its Annual Report.
3.9 We believe there are reasonable grounds to suspect that Jeff Verheggen had, at various times in 1997 and subsequently, a relevant interest in 11,619,898 Max shares (29.68% of the voting securities of Max). The Company reported a relevant interest of Jeff Verheggen in 5,650,142 shares (14.43%) in its 1997 Annual Report and Jeff Verheggen filed a substantial security holder notice with the NZSE on 8 August 1997 in respect of a similar number of shares (5,650,000). This leaves 5,969,756 shares (15.25%) concerning which we believe there are reasonable grounds to suspect Jeff Verheggen had a relevant interest and in respect of which there was no disclosure to the NZSE or, to our knowledge, to the Company, as required by Part II of the Amendment Act. (For further explanation see para 5.15 onwards and Appendix B.)
 
3.10 We also believe there are reasonable grounds to suspect that Jeff Verheggen changed his relevant interests in the voting securities of Max by more than 1% in 1997. In May 1997 Jeff Verheggen entered into a put option with TPIC Limited, a wholly-owned subsidiary of Wyllie Group Pty Limited, under which he agreed to buy back 1,397,000 Max shares during a one month period late in 1997 if they were put to him. We do not know whether TPIC Limited acquired these shares from Jeff Verheggen subject to the put option, or whether Jeff Verheggen agreed to give a put option in respect of shares to be acquired by TPIC Limited on the market. We believe Jeff Verheggen changed his relevant interest in Max shares for a period late in 1997 when the put option for 1,397,000 shares (3.6% of voting securities) he had granted to TPIC Limited was put back to him, without disclosing this change as required by the Amendment Act.
 
3.11 When the respective interests attributed to fellow directors Briggs and Jeff Verheggen referred to in paragraphs 3.8, 3.9 and 3.10 are combined, the overall total of Max shares in which we believe there are reasonable grounds to suspect that they had, in aggregate, a relevant interest in late 1997, was in the order of 16,119,898 (41.17%).
 
3.12 In addition, it appears that Pica (M) Corporation Berhad ("Pica Corporation"), a company listed on the Kuala Lumpur Stock Exchange, held, as at 30 October 1997, a relevant interest in 5,810,000 Max shares (14.84% of the voting securities). These holdings were held through Myles Nominees Pte Limited ("Myles Nominees"), a wholly owned subsidiary of Pica Corporation as to 5,000,000 (12.77% of the voting securities) and through PS Holdings Limited, also a wholly-owned subsidiary of Pica Corporation, as to the balance of 810,000 Max shares. Although Myles Nominees gave notice of its 12.77% interest, Pica Corporation did not disclose its interest in 14.84% of Max shares to the NZSE nor, to our knowledge, to the Company, as required by Part II of the Amendment Act. In addition, Mr Salim Cassim, a substantial security holder of Pica Corporation, held some 800,006 Max shares personally. Cassim has informed the Commission that at the time of purchase he was not aware that Myles Nominees had bought Max shares.
 
3.13 We have also been told by Jeff Verheggen that 4,400,000 shares (11.24% of the voting shares of Max at 30 October 1997), registered in the names of two nominees, are held on behalf of an organisation called Global Portfolio Management, at the time based in London, England. Global Portfolio Management's interest in these shares was not disclosed to the NZSE and nor was it disclosed, as far as we are aware, to the Company in accordance with the law. We understand that Global Portfolio Management is managed or controlled by a Mr Connor Maloney.
 
3.14 Based on our observations in paragraphs 3.8 to 3.13 above, we consider that there has been significant non-compliance with the disclosure requirements of Part II of the Amendment Act by Jeff Verheggen, Briggs and Global Portfolio Management. We also consider that Pica Corporation has not complied with the law. As a result, information about the extent of the shareholding interests by these people, and about changes to some of those interests, was denied to Max's other shareholders and to the markets of Australia and New Zealand.

Conduct of Max's Directors in Relation to Transactions Entered into by Max in 1996/1997

Change of business direction

 
3.15 Around November 1996 Max's directors decided to change the nature of the Company's business from the holding of interests in mining tenements to the processing of organic fertilizer. This change of business direction was referred to in a statement released to the NZSE on 13 December 1996. On 8 May 1997 the directors obtained shareholder approval to this in accordance with NZSE Listing Rules. This decision of directors was material to a number of important transactions.

Purchase of fertiliser processing plants in the United States and Asia
 
3.16 In December 1996 Max's directors decided to purchase a WRS plant in Ohio in the United States. The purchase price was US$0.7 million, with payment of US$100,000 in the form of a non-refundable deposit before the end of December 1996 and the balance payable at the end of January 1997. An announcement of the purchase, including a statement that it was subject to shareholder approval, was included in the statement to the NZSE of 13 December 1996 referred to above.
 
3.17 In February 1997 Max advised the NZSE that it had acquired interests in WRS plants in Indonesia, Sri Lanka and India. These were acquired for consideration of 5 million Max shares issued to companies nominated by Briggs.
3.18 Significant funds were committed to the Ohio transaction before the Max shareholders approved a change in the nature of Max's business in accordance with the NZSE Listing Rules at their meeting on 8 May 1997.

The French Venture
 
3.19 WRS Europe, which was owned by Max director Jeff Verheggen and his father, Verheggen Snr, had a right to acquire an 87% interest in AFA, a French company developing a WRS plant at St Thois, France ("the French Venture")1 . The Verheggens arranged for Max to acquire this right by the Company purchasing all the shares in WRS Europe. As consideration for the shares in WRS Europe Max agreed, at a meeting of directors on 12 December 19962 , to:

  1. Issue 20 million 31 July 1999 Max share options to Jeff Verheggen and Verheggen Snr;

  2. Inject FF1.96 million of long term loan funds into WRS Europe to enable that company to meet financial obligations it had entered into in respect of the French Venture; and

  3. Obtain a loan of FF13 million from a French bank over a period of 10 months at a rate of 6% p.a. interest and to make money available to assist with development of the French plant.

Jeff Verheggen has told us that the issue of Max options to himself and his father did not take place.
 
3.20 Max's directors would have been well aware that the purchase by Max of shares in WRS Europe was a material transaction with a related party and that the Company needed to comply with Rule 9.2.1 of the Listing Rules. Rule 9.2.1 provides that an issuer shall not enter into a material transaction with a related party unless it has been approved by an ordinary resolution of the issuer in general meeting. Further, an appraisal report prepared by an independent expert is required to accompany the notice of meeting called to consider the resolution.
 
3.21 Indeed, the need to obtain shareholder approval and an independent appraisal report is referred to in various Company papers, including the 1997 Annual Report and the initial announcement to the NZSE. Max's directors were also well aware that the directors needed to secure shareholder consent to any change in business for the Company (see paragraph 3.15 above).
3.22 In mid-December 1996 Max's directors commissioned KPMG Corporate Pty Limited (Perth) ("KPMG") to prepare an independent appraisal report to put to the meeting of shareholders necessary to approve the purchase of WRS Europe shares. KPMG in turn commissioned its French counterpart firm to prepare a report on the French Venture. However, the appraisal report was not formally released by KPMG (France) to Max because of a dispute over non-payment of a fee owed by Max to KPMG (France). Shareholder approval to the transaction was not obtained and it appears the transactions between Max and WRS Europe, or by Max on behalf of WRS Europe, were in breach of the NZSE Listing Rules.
 
3.23 Despite this, Max forwarded a total of around NZ$1.18 million to France in respect of the French Venture. In December 1996 Max sent approximately NZ$0.5 million (FF2.56 million) to Conception Realisations Industrielles et Immobilieres ("CR2I"), the company constructing the French plant for AFA, a payment said by Langoulant in affidavit evidence to be "... on behalf of WRS Europe". Further sums were paid in respect of the French Venture in June 1997 and in October 1997, when A$0.24 million from the sale of Robregal's interest in Intrepid was loaned to CR2I.
 
3.24 Since agreeing to acquire WRS Europe Max has had difficulty in meeting the financial requirements of the French Venture. At the date of this report, the statutory managers had entered into an agreement to sell Max's fertiliser assets (including the remaining interest in AFA). Max's investment of around NZ$1.18 million in the French Venture has not been fully recovered.
 
3.25 The NZSE Listing Rules require any transaction needing shareholder approval to be made conditional on obtaining such approval. Moreover the Listing Rules state that the transaction shall not be completed until the approval is obtained and, if approval is not obtained, the public issuer shall terminate its obligations. In this case, Max's shareholders did not have the opportunity to vote on the French Venture or have the benefit of an independent appraisal report which would have enabled them to decide whether the transaction price and terms were fair. Around NZ$1.18 million was loaned to CR2I under the transaction, even though it had not been approved by Max's shareholders and the acquisition of WRS Europe was never actually formally completed.

Comment

 
3.26 The Commission considers that there are reasons to conclude that one or more of the directors did not show sufficient regard for:

  1. their duties to Max; and

  2. their obligation to use their best endeavours to procure Max's compliance with the NZSE Listing Rules; and

  3. the interests of Max's shareholders;

with respect to these transactions involving the French venture.


1 We understand that, because certain share transfers had not been effected in AFA, WRS Europe was not in fact entitled to 87% of AFA. This matter was unresolved at the time of the statutory management of Max. - BACK

2 The minutes of the meeting noted the interest of Jeff Verheggen and his father in the transaction and that it was a material related party transaction. There is no indication in the minutes of the meeting that Jeff Verheggen did not participate in discussion on this matter. There is also no statement in the minutes identifying the directors who voted for the resolution, although Langoulant and Jeff Verheggen have told us Jeff Verheggen did not vote on the resolution. - BACK

4

ISSUES CONSIDERED IN VOLUME 1
 
4.1 As noted in paragraph 3.3, the Commission has considered the following issues in preparing this volume of the report:

  1. Was there significant non-compliance with the requirements of Part II of the Amendment Act in respect of the disclosure of relevant interests in Max's listed securities? In particular, was there significant non-compliance with these requirements by any of the directors of Max, or any persons associated with them?

  2. Did Max's directors, in procuring Max to enter into certain transactions in 1996 and 1997, have proper regard to their duties to the Company and the interests of Max's shareholders and creditors, in particular:

    1. the duty to act in good faith and in what they believe to be the best interests of the Company; and

    2. the duty to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances?


5

DISCLOSURE OF RELEVANT INTERESTS IN MAX'S LISTED SECURITIES

Legal requirements for disclosure of relevant interests
 
5.1 Under Part II of the Amendment Act, every person who becomes a substantial security holder in a public issuer is required to give notice of that fact (in the prescribed form) to the NZSE and the public issuer. "Substantial security holder" is defined as a person who has a "relevant interest" in 5 % or more of the voting securities of the public issuer. The notice must be given as soon as the person knows, or ought to know, that the person is a substantial security holder. Notice must also be given where a substantial security holder's relevant interest has changed by 1% or more of the issuer's voting securities.
 
5.2 "Relevant interest" is defined widely in the Amendment Act and includes any form of beneficial ownership, the power to acquire or dispose of, or control the acquisition or disposition of, the securities, and the power to exercise the voting rights or the power to control the exercise of the voting rights. The power may be express or implied, direct or indirect, legally enforceable or not, exercisable presently or in the future, or exercisable singly or jointly with another person.
 
5.3 The High Court may, on application, where there are "... reasonable grounds to suspect that a substantial security holder has not complied..." with the law, make orders as prescribed in the Amendment Act. These orders include: prohibition on the exercise of voting rights; directions to the public issuer not to register the transfer of securities; restraint on the security holder from disposing of the securities; direction to the security holder to dispose of the securities; order directing the forfeiture of the securities; or a declaration that the exercise of voting rights attaching to the securities is void and of no effect. Appendix A to this report sets out the relevant definitions from the Amendment Act.

Relevant substantial security holder notices filed with NZSE in the period 1 April 1996 to 30 October 1997
 
5.4 As at 30 October 1997, Max had on issue:

  • 39,147,499 ordinary fully paid 25 cent shares

  • 22,967,725 options to acquire fully paid 25 cent shares on or before 31 July 1999. The options carried no voting rights.
 
5.5 On 8 August 1997, Jeff Verheggen notified the NZSE of a relevant interest in 5.65 million shares held either in his own name or in the name of Gybson Pty Limited. At the time, this constituted 16.61 % of the voting securities on issue. This percentage would have reduced to 14.43% of the voting securities in Max after an increase in Max's share capital carried out in October 1997.
 
5.6 On 15 August 1997, Myles Nominees gave notice to the NZSE of a relevant interest in 5 million Max shares it had acquired on 7 August 1997, constituting 14.7% of the voting securities on issue. After the increase in Max's share capital in October 1997, this would have reduced to 12.77% of the voting securities in Max.

The McLernon Group report to NZSE
 
5.7 On 28 April 1998, the McLernon Group provided the NZSE with a report they had prepared concerning the apparent non-disclosure of interests by substantial security holders in Max. The McLernon Group report concluded that shareholdings or interests through related or controlled offshore entities were not fully disclosed and this had enabled Jeff Verheggen and Briggs to covertly control Max.

Our Enquiries
 
5.8 The Commission has undertaken enquiries in order to identify all the persons who may hold, or may have held, interests in the largest 20 shareholdings listed in the 1997 Annual Report. For the purposes of this enquiry, we have sought the assistance of various overseas regulatory authorities. The Commission also referred to the files of McLernon Group concerning their enquiry into Max's affairs, which were provided to us pursuant to a summons issued under section 18(3) of the Act. (Langoulant said in submissions to us that "The validity of information provided by the McLernon Group is flawed in that it contains a large amount of conjecture and hearsay. ...".)
 
5.9 In conducting this investigation, we have encountered a labyrinth of nominees. The Commission, in conducting enquiries of this nature, is well acquainted with the use of nominees. In our experience, we typically find that the use of multiple layers of nominees in relation to substantial security holdings is indicative of a design to hamper enquiries to determine the identities of individuals interested in shareholdings. This is particularly the case where enquiries reveal that a nominee does not appear to exist or has supplied incorrect information about itself.
 
5.10 In the course of our enquiries into the disclosure of relevant interests in Max, we have had regard to the threshold for action under the substantial security holder provisions of Part II of the Amendment Act. For the Court to be able to make orders under section 32 of the Amendment Act, it needs to be shown (section 30) that there "are reasonable grounds to suspect that a substantial security holder has not complied".
 
5.11 For the purposes of this report, we have assumed that the 22,967,725 Max options on issue, being options to acquire yet-to-be issued Max shares, did not constitute "voting securities". While acknowledging that there is some uncertainty in the law in this area, the Commission is of the view that options do not constitute "voting securities" for the purposes of the law unless they confer a right in respect of a security already on issue. We do not have detailed information in our possession regarding the beneficial ownership of the Max options. This report assumes that the Max ordinary shares are the only "voting securities" for the purposes of substantial security holder disclosure.
 
5.12 A table setting out the relevant parcels of Max shares and the association of the registered holders with related parties as at 30 October 1997 is set out below. The "registered holder" is the person named in Max's 1997 Annual Report. A more detailed description of the basis for our conclusions about the associations between the various parties is set out in Appendix B.
 
 
REGISTERED HOLDER

(and number of shares)

 HELD ON BEHALF OF

(and number of shares)

 PERSONS WITH RELEVANT INTEREST
SBC Warburg NZ (7,553,400) PS Holdings Limited
(810,000)		 Pica Corporation
  Myles Nominees Pte Limited
(5,000,000)		 Pica Corporation
Jeff Verheggen - put and call option arrangement with Pica in respect of 2,500,000 Max shares
  TPIC Limited
(1,397,000)		 Wyllie Group -Jeff Verheggen granted TPIC Limited a put option for these shares which was exercised in late 1997.
NZ Central Securities
Depository (4,434,286		 Citibank Nominees (New Zealand)
Limited (3,400,000)		 Citibank London
Held for Global Portfolio Management, London (Maloney)
  National Nominees (NZ)
Limited (1,000,000)		 Royal Bank of Scotland plc Held for Global Portfolio Management, London (Maloney). Total interest 4.4 million = 11.24%.
Gybson Pty Ltd (3,000,000) Jeff Verheggen Jeff Verheggen
Hendry Nominees Ltd
a/c 486 (2,794,815) 		Bohemia Pty Limited (45,700)
S Cassim (257,148)		 No ASIC Record of company
S Cassim
  City Merchants P/L (24,739) Unable to locate entity
  European Fund Perth (185,000) Suspect Jeff Verheggen
  Grosvenor Securities Limited (682,652) Suspect Jeff Verheggen
  Gybson Pty Limited (177,074) Jeff Verheggen
  Isseka PL (171,429) Paul Blackman (Partner, Clayton Utz, Solicitors, Perth)
  Pine Valley Enterprises Pty Limited (244,285) Verheggen Snr, also suspect Jeff Verheggen
  R Verheggen (50,000) Jeff Verheggen's sister.
Forbar Nominees Ltd
(2,567,900)		 Hartley Poynton Limited (Perth) Grosvenor Securities Limited (179,900) - Suspect Jeff Verheggen
    Gybson Pty Limited (225,000)
- Jeff Verheggen
    Pine Valley Enterprises Pty Limited (853,000) - Verheggen Snr, also suspect Jeff Verheggen
    TPIC Limited (1,000,000) (Wyllie)-Jeff Verheggen granted a put option to Wyllie. Option exercised in late 1997
Hampton Snow Ltd (2,135,000)   Suspect Briggs
Interbac Australasia Pty Ltd (2,000,000) Briggs Briggs
Fidelity Mutual Funds Management Inc (928,572)   Suspect Jeff Verheggen
Zurich Capital Management (785,715)   Suspect Jeff Verheggen
Hendry Nominees Ltd
a/c 263 (681,143)		 Leeward Trading Limited
(405,000)		  
Salim Cassim (542,858) Salim Cassim Salim Cassim
Wilbur Nominees Ltd (511,700) Patterson Ord Minnett (Perth)
(80,000)		 Grosvenor Securities Limited - Suspect Jeff Verheggen
  Montagu Stock Brokers (Perth)
(431,700) 		Grosvenor Securities Limited (381,700)- Suspect Jeff Verheggen
Isseka Ltd (400,000) Isseka Pty Limited Paul Blackman informs us that he had these shares but sold them in November 1996, notwithstanding Isseka remaining listed as a shareholder in the 1997 Annual Report.

The relevant interests of Mr Briggs

 
5.13 On the basis of the information in our possession, and having regard to submissions made by Briggs, the holdings in which we know, or in which we believe there are reasonable grounds to suspect, that Briggs had a relevant interest in 1997 and subsequently are as follows:

Hampton Snow Ltd 2,135,000
Interbac Australasia Pty Ltd 2,000,000
Capital Resources Pty Limited 325,000
Natural Resources Finance Pty Limited 40,000
4,500,000 11.49%

None of these relevant interests were disclosed to the NZSE or the Company in accordance with the law

 
5.14 Our reasons for coming to this conclusion concerning Briggs's relevant interests are as follows:
  1. Briggs has acknowledged he has a relevant interest in the shares of Max held by Interbac Australasia, Capital Resources and Natural Resources;

  2. Although Briggs has told us that he has "never owned or controlled" Hampton Snow:
    1. There was correspondence between Briggs and Hampton Snow in November 1996 from which it appears Briggs may have had the ability to direct the affairs of Hampton Snow;

    2. There was a letter of 20 June 1997 to Max, from WRS Pacific, and signed by Briggs, in which Briggs directed how the Max shares received in consideration for the sale of WRS assets were to be issued and in which he referred to "receiving our share certificates";

    3. There are statements made by Lunt, in correspondence with McShane in February and March 1998, in which he refers to Hampton Snow as a company "owned" or being a "nominee [company]" of Briggs.

See Appendix B for reference to this and other relevant material.

The relevant interests of Mr Jeff Verheggen
 
5.15 On the basis of information in our possession, and having regard to the submissions made to us by Jeff Verheggen and Langoulant, the holdings in which we know, or in which we believe there are reasonable grounds to suspect, that Jeff Verheggen had a relevant interest at times during 1997 were as follows:

Disclosed to the NZSE in August 1997: 5,650,142 14.43%
Relevant interests    
Gybson Pty Limited 3,402,074  
Pica option 2,500,000  
Wyllie (TPIC) option 1,397,000  
Grosvenor Securities Ltd 1,324,252  
Fidelity Mutual Funds Management Inc 928,572  
Zurich Capital Management Ltd 785,715  
European Fund, Perth 185,000  
Pine Valley Enterprises Pty Ltd 1,097,285  
   
Total actual and suspected relevant interests 11,619,898 29.68%
 
5.16 Our reasons for coming to this conclusion in relation to Jeff Verheggen's relevant interests or suspected relevant interests are as follows:
  1. Jeff Verheggen gave notice of relevant interests in 5.65 million Max shares in August 1997 and has acknowledged his interests currently comprise the holdings held by or for Gybson Pty Limited and the remaining Pica option;

  2. Jeff Verheggen entered into a put option arrangement with Wyllie of TPIC Limited in May 1997 in respect of 1.397 million Max shares. This option was exercised by TPIC late in 1997, although we understand Jeff Verheggen was unable to pay for the shares and they remain in the ownership of TPIC.

    In the period from the time the shares were put back to Jeff Verheggen until a settlement arrangement was reached with TPIC we believe Jeff Verheggen had a relevant interest in these shares.

    These shares comprised some 3.4% of Max's voting shares. In addition to the requirement to disclose overall interests that exceed 5% of the voting securities of a company, notification to the NZSE is also required when a substantial security holder changes its interest by 1% or more of the voting securities. At no time were Jeff Verheggen's relevant interest in these shares, or the changes in his relevant interests, disclosed to the NZSE or, we believe, to the Company, as required by law;

  3. We believe there are reasonable grounds to suspect that Jeff Verheggen had and has relevant interests in shares held by or for Grosvenor Securities, Fidelity Funds Management, Zurich Capital Management and European Fund. The basis for this view is set out in the material referred to in the last three pages of Appendix B. We believe Jeff Verheggen demonstrated an ability to control the disposition of holdings registered in the names of Grosvenor Securities, Fidelity Funds Management, Zurich Capital Management and European Fund.

    Jeff Verheggen, in his first submissions to us, said he had no interest in shares held by these named entities. Jeff Verheggen later told us, in further submissions, that he had hoped to utilise scrip from clients of Mr Richard Rowe of Mercator Trust Company Limited, Guernsey, Channel Islands ("Mercator"), for which he was to pay a fee, to use as security for a loan to purchase other shares, but the parties had been unable to resolve the fee payable. As a result "... the shares and transfers were never provided and that security was neither lodged nor took effect." However we have copies of a facsimile message from Mercator to a Mr Barry Panos of Transcontinental Resources Limited of 27 March 1995 forwarding to Panos executed transfers out of the names of Zurich Capital Management, Fidelity Mutual Funds Management, Grosvenor Securities and Standard Investments and of a similar message of 22 March 1995 with an executed transfer in the name of European Fund Managers. A message of 21 March 1995 from Rowe of Mercator to Panos referred to Mercator completing five stock transfer forms "On Mr Verheggen's instructions";

  4. We understand that Pine Valley Enterprises is owned by Verheggen Snr. On the basis of material provided to us and referred to in Appendix B, particularly that related to the "Inovax" settlement, we believe there are reasonable grounds to suspect that Jeff Verheggen has a relevant interest in shares held by Pine Valley Enterprises. We think, on the basis of the Inovax material, that this interest could arise from an ability to control the acquisition or disposition of voting securities held by Pine Valley Enterprises. Jeff Verheggen has told us he has no interest in these shares. Verheggen Snr has also "categorically [denied]" that Jeff Verheggen has any interest in shares held by Pine Valley, although he says he (Verheggen Snr) has sometimes acted as guarantor for Jeff Verheggen.

  5. Our conclusions are supported by a handwritten note from Jeff Verheggen to Maloney referred to in the McLernon Group report. This handwritten note stated that in October 1997 the following entities held major shareholdings in Max:

    "JJV (personally) 5.65 m
    JJV + FAMILY 5.2 m
    WRS (to be issued) 5.0 m
    Connor 4.0 m (PLUS)
    BOB PETERS 3.0 m
    PICA (Malaysians) 3.5 m
    JOHN CARTWRIGHT 1.30 m
    Bill Wyllie 1.9 m
    Argosy Asset Mgt 1.1 m
    Joe THROSBY 1.0 m
    31.65m
       
    OUT OF TOTAL 39,012,185m"

  6. Jeff Verheggen, in his first submissions to us, acknowledged that he "...had a relationship with all the major shareholders." He has told us that he "know[s]" "Richard Rowe" (Mercator), "Mr Aziz Hussein" (Pica), "Dr Salim Cassim" (Pica), "Joe Throsby, Bob Peters, John Cartwright, Connor Moloney[sic]" (Global Portfolio Management), "Bill Wyllie, Peter Briggs,[and] Ian Williams", and said that "... at various times I have borrowed money or had other commercial relationships with some of these people, but I do not own or control their holdings." In his later submissions Jeff Verheggen, referring to the handwritten note set out in the preceding paragraph, said that "The shares in 'JJV Personally' and 'JJV family' overlap by 3 million shares which were beneficially held by Gybson Pty Ltd on behalf of my father. ...". According to our analysis Gybson Pty Limited only has 3.4 million shares in Max. In his earlier submissions Jeff Verheggen said his holdings consisted only of those in Gybson Pty Ltd and the remains of the Pica option. We do not understand his later submission.

The relevant interests of Pica Corporation

 
5.17 On the basis of the information in our possession we believe that the holdings in which Pica Corporation had a relevant interest in 1997 were:
PS Holdings Limited 810,000 2.06%
Myles Nominees PTE Ltd 5,000,000 12.77%
Total relevant interest 5,810,000 14.84% (Of which Myles Nominees' holding was disclosed)
 
5.18 PS Holdings and Myles Nominees are subsidiaries of Pica Corporation. We believe that Pica Corporation had, as at 30 October 1997, a relevant interest in 5,810,000 Max shares (14.84% of the voting securities in Max). While Myles Nominees gave notice to the NZSE on 15 August 1997 of a relevant interest in 5,000,000 shares, it appears that Pica Corporation also had a relevant interest in the shares held by Myles Nominees through its ability to control Myles Nominees. Pica Corporation has not filed a substantial security holder notice with the NZSE.

The relevant interests of Global Portfolio Management
 
5.19 In the course of our enquiries we observed holdings of 3,400,000 Max shares held by Citibank Nominees New Zealand Limited and 1,000,000 shares held by National Nominees (N.Z.) Limited. Our research indicated that these holdings were held on behalf of an entity called Global Portfolio Management based in London, England. This information has been confirmed by Jeff Verheggen. Jeff Verheggen identifies Global Portfolio Management with a "Connor Maloney".
 
5.20 4,400,000 shares in Max constitute 11.24% of the voting securities. This interest has not been disclosed to the NZSE, or, we understand, to the Company, as required by law.

Conclusion
 
5.21 Based on the above, and taking into account Jeff Verheggen's and Briggs' submissions, we consider that there has been significant non-compliance with the disclosure requirements of Part II of the Amendment Act by Jeff Verheggen, Briggs and Global Portfolio Management.3 We also consider that Pica Corporation has not complied with the law. As a result information about the extent of the respective shareholding interests of these people was denied to Max's other shareholders and to the markets of Australia and New Zealand.

 
3Conclusion. We have communicated by facsimile to a facsimile number obtained from our files, and by letter delivered by courier to a street address in London obtained from the same source. Return

6

Conduct of Max's directors in relation to transactions entered into by Max in 1996/1997

Change in the nature of Max's principal business in May 1997
 
6.1 Around November 1996 Max's directors decided to change the nature of the Company's business from the holding of interests in mining tenements to the processing of organic fertilizer. Minutes of a telephone conference meeting of the four Max directors on 27 November 1996 recorded that:
  1. Directors had been unable to complete acceptable negotiations to acquire Asian WRS plants;

  2. A WRS plant in Ohio, United States of America was available for purchase for US$700,000 but a non-refundable deposit of US$100,000 was required within the next week;

  3. Max had the opportunity to buy directly into the French WRS plant with an issue of options in Max to be made to Max's then director Jeff Verheggen and his father Verheggen Snr in consideration for their interest in WRS Europe 4 , but that A$460,000 needed to be lodged with AFA's bankers within the next week;

  4. Further short term borrowings or asset sales would be needed to finance these purchases.
 
6.2 On 8 May 1997 Max's directors obtained the required shareholder approval to change the Company's principal business from the holding of interests in mining tenements to the manufacture and distribution of organic fertilizer.

The purchase of the Ohio WRS Plant by Max
 
6.3 We have copies of correspondence indicating that in late 1996 WRS Pacific (Briggs) was negotiating, via Hampton Snow, with an American company, J G Turner Inc, for the purchase of a WRS plant in Ohio. It would appear from this correspondence that WRS Pacific decided not to proceed with the acquisition and that it was arranged that Max would purchase the Ohio plant instead.
 
6.4 The correspondence supporting this interpretation of events includes:
  1. A copy of a letter from a W S Cairns (a director of Hampton Snow) to Mr Trevor Lunt (then managing director of WRS Pacific), dated 19 November 1996, enclosing a copy of an executed agreement for the sale of the Ohio plant. This states that the agreement is to be held in escrow by Lunt.

  2. A copy of a joint letter from Briggs and Lunt to Cairns, dated 28 November 1996, instructing Cairns to write a letter (in the same form as a draft attached to the joint letter) to J G Turner Inc's New York lawyers, advising that Hampton Snow had decided not to proceed with the acquisition of the Ohio plant but understood that another party (Max) was immediately ready to proceed with the purchase.

  3. A copy of an agreement for sale and purchase, dated 3 December 1996, between Max and J G Turner Inc for the purchase of the Ohio plant by Max.

See Appendix B for a fuller account of the purchase of the Ohio plant.

 
6.5 A teleconference meeting of all of Max's directors was held on 12 December 1996. The minutes of this meeting record that the purchase of the Ohio plant had been secured by payment of a non-refundable deposit of US$100,000 with the balance of US$600,000 to be paid by 31 January 1997. The purchase agreement was acknowledged to be subject to shareholder approval, to be obtained by 17 January 1997. However, Langoulant advised the meeting that it was not feasible to hold a shareholders' meeting by that date. The teleconference meeting concluded "that shareholder approval...was not required as the Board took the view that the (plant) can be purchased as an investment (initially not for trading activities)." It was noted that "verbal advice from Lowndes Jordan [solicitors] had confirmed this position". Lowndes Jordan has said in submissions to us that they gave advice to Langoulant in relation to this transaction but deny giving advice of this nature.
 
6.6 As Briggs (a major shareholder in WRS Pacific) did not become a director of Max until 4 January 1998, there does not appear to have been a conflict of interest on Brigg's part at the time this transaction was arranged. Nor do we have evidence of any other of the directors having a conflict of interest in respect of this transaction. However it appears from the Company's records that significant remittances of funds, amounting to more than NZ$1.35 million, were made to the venture from late January 1997 to April 1997, indicating that Max may have been committed to the purchase of the Ohio plant before the shareholders had approved the change in the Company's principal business.

The French Venture

 
6.7 In 1996 WRS Pacific held an 87% interest in AFA, a French company engaged in a joint venture for the construction of a WRS plant at St Thois, France. WRS Pacific was owned by Briggs, and employees Lunt and Mr Robert Skidmore. Briggs had applied to be appointed a director of AFA on the basis of WRS Pacific's 87% interest.
 
6.8 It appears that, as part of the joint venture, WRS Pacific had assumed a number of financial obligations to a French company, CR2I, in connection with the construction of the French WRS plant. By mid 1996 the venture was in financial difficulty, with losses of approximately FF1.974 million. WRS Pacific was having difficulty meeting its funding obligations to the venture, thereby hindering CR2I's ability to complete the development of the plant. A cash injection was needed to sustain the venture. We understand that WRS Pacific approached Jeff Verheggen in this regard.
 
6.9 Against this background, it appears that in August 1996 an arrangement was made whereby AFA reduced the face value of its shares from FF100 to FF10. This left AFA with a share capital of around FF176,500. AFA agreed to increase its share capital by issuing 256,000 new shares (87% of the expanded capital) to WRS Europe, a company owned by the Verheggens, and a further 21,350 new shares to CR2I. It is evident, however, that the required actions by AFA were not completed and WRS Europe did not formally acquire an 87% interest in AFA.
 
6.10 WRS Europe agreed to purchase the shares for a total consideration of FF2.56 million. Verheggen Snr made an initial payment of FF600,000 and agreed to pay the balance (FF1.96 million) in instalments.
 
6.11 Around November 1996, arrangements were made for Max to acquire the Verheggens' interest in the French WRS plant by Max purchasing all their shares in WRS Europe. As consideration for the shares, Max agreed at a teleconference meeting of the four Max directors on 12 December 1996, to:
  1. Issue 20 million 31 July 1999 Max share options to Jeff Verheggen and Verheggen Snr;

  2. Inject FF1.96 million of long term loan funds into WRS Europe so that it could meet its financial obligations to the French venture; and

  3. Obtain a loan of FF13 million from a French bank over a period of 10 months at a rate of 6% p.a. interest and make that available to fund AFA's development of the French plant.

Jeff Verheggen has told us that the issue of Max options to himself and his father did not take place.

 
6.12 The minutes of the meeting held on 12 December 1996 recorded the interest of both Jeff Verheggen and Verheggen Snr in the French Venture. The minutes recorded:

It was noted that this transaction was a Material related party transaction and KPMG of Perth had been commissioned to prepare the required Appraisal Report. This report would ascertain whether the transaction was fair to all shareholders.
 
6.13 The minutes also recorded "that FF1,600,000 had been loaned to WRSEL [WRS Europe] to meet certain of its obligations on the basis that these funds will be refunded if Max did not proceed with the WRSEL transaction", and that "a further FF360,000 was required to be advanced to WRSEL by 16 December 1996 to meet its additional obligations" [to the company constructing the French plant, CR2I].
 
6.14 The directors of Max 5 resolved at the meeting "... to enter into a contract of sale with the Verheggens whereby Max acquires 100% of WRSEL in consideration for the issue of 20 million unlisted 31 July 1999 options and the provision of long term loan funds of FF1,960,000 to WRSEL." (The minutes do not record any conditions attaching to the acquisition. The FF1.96 million appears to be the sum of the two loan amounts referred to in the preceding paragraph.)
 
6.15 In mid-December 1996, Max's directors commissioned KPMG to prepare an independent appraisal report to put to the meeting of shareholders necessary to approve the purchase of WRS Europe and related transactions. However, we understand that the appraisal report was not formally released by KPMG to Max due to a dispute over non-payment of a fee owed by Max to KPMG.
 
6.16 It appears, from an unsigned copy of an agreement between Jeff Verheggen and a Jean- Claude Fritsch of CR2I (a document attached to McShane's first affidavit), that Max gave an undertaking (apparently signed by Jeff Verheggen on 27 March 1997) to raise FF13 million (A$2.827 million) from a French bank over a period of about 10 months to fund the development of the French WRS plant by CR2I. This obligation did not appear to have been agreed to by the directors of Max. (McShane said in his affidavit that he had not seen the 27 March 1997 document until November 1997.) In the same document Verheggen agreed, in order "...to meet the working capital requirement of the A.F.A. company.." to "procure the Max Resources company to pay the minimum sum of FF3 million."
 
6.17 Langoulant said in his affidavit evidence that this document was "a summary of many additional discussions and negotiations Jeff Verheggen had with officers of CR2I in the French Project with no conclusive binding effect on Max." In a submission to us Langoulant said that this was not a contractual document to which Max was a party and did not place any funding commitments upon Max. However we note from files in our possession a copy of the first page of a facsimile message of 24 November 1997, addressed to "Tom and Owen", apparently from Langoulant, and sent in response to a message from McShane to Langoulant dated 21 November 1997. McShane had expressed his concerns about funds being sent by Max to France. The author of the 24 November message said "You seem to forget that Max has a contract to buy the French project, subject to shareholder approval, which means we have a [legal] obligation, not to mention a financial reason, for protecting the French project."
 
6.18 The French Venture involved transactions with or on behalf of a related party of Max. In terms of the Listing Rules of the NZSE (Rule 9.2.1) an issuer should not enter into a material transaction with a related party unless the transaction had been approved by an ordinary resolution of the company. An Appraisal Report by an independent expert has to be provided to members of the issuer at the time they vote on the resolution.
 
6.19 Max's directors were well aware of this requirement. It was referred to both in an appendix to the Information Memorandum provided to shareholders of Max for their Extraordinary General Meeting on 8 May 1997 (held to approve the change in the Company's principal business), in the 1997 Annual Report, and in the announcement to the NZSE in December 1996.
 
6.20 In the Information Memorandum it was stated, under the heading "Potential Purchase of Organic Fertiliser Interests St Thois, France" that Max had "agreed to purchase" 100% of the issued capital of WRS Europe. The text referred to the related party nature of the transaction and of the need for an Appraisal Report. It noted that Max was encountering difficulties in completing due diligence and that KPMG could not complete its Appraisal Report. The Memorandum said that it was expected that the meeting of shareholders to approve the transaction would be held in June 1997.
 
6.21 The 1997 Annual Report referred at page 6 to the St Thois plant. Again reference was made to the need for shareholder approval but no reference was made as to when this would be sought.
 
6.22 To date Max's involvement with the French Venture has not been approved by the Company's shareholders. This would appear to be a breach of the Listing Rules.
 
6.23 The NZSE Listing Rules require any transaction needing shareholder approval to be made conditional upon obtaining such approval. Moreover, the Listing Rules state that the transaction shall not be completed until the approval is obtained and, if the approval is not obtained, the public issuer shall terminate its obligations. In this case, Max's shareholders were deprived of the opportunity to vote on the French transaction with the benefit of an independent appraisal report which would have stated, among other things, whether the terms and conditions of the proposed transaction were fair to the remaining shareholders.
 
6.24 Despite not having obtained shareholder approval, and the transaction with the Verheggens not having been completed, Max forwarded around NZ$1.18 million to the French venture in the form of loans to CR2I on behalf of WRS Europe. In December 1996 Max sent approximately NZ$500,000 to CR2I. Further sums were advanced to the French venture in June 1997 (to CR2I via WRS Europe) and in October 1997, when A$240,000 from the sale of Robregal's interest in Intrepid was forwarded to CR2I.
 
6.25 Since agreeing to acquire WRS Europe, Max has had difficulty in meeting the financial requirements of the venture.
 
6.26 At the date of this report, the statutory managers had entered into an agreement to sell Max's fertiliser assets (including the remaining interest in AFA). On the price to be paid by the purchasers, Max's investment of around NZ$1.2 million will not be fully recovered.

Conclusions relating to the French Venture
 
6.27 The Commission considers that there are reasons to conclude that one or more of the directors did not show sufficient regard for:
  1. their duties to Max; and

  2. their obligation to the NZSE to use their best endeavours to procure Max's compliance with the Listing Rules; and

  3. the interests of Max's shareholders;

with respect to these transactions involving the French venture.

 

4 Our information suggests that in 1996 WRS Pacific, a company owned by current Max director Briggs, and employees Skidmore and Lunt, had an 87% interest in AFA. This interest involved financial commitments to the venture that WRS Pacific could not meet. Subsequently AFA resolved to increase its issued capital by issuing new shares to WRS Europe, Jeff Verheggen and Verheggen Snr's company, which would result in WRS Europe having an 87% interest in AFA. (We understand this issue of shares did not take place.) Max purchased WRS Pacific by the issue of 5 million Max shares to companies associated with Briggs, and agreed to acquire WRS Europe in exchange for taking over WRS Europe's funding commitments to the French venture and the issue of 20 million options in Max shares to the Verheggens. Return

5 The minutes of the meeting noted the interest of Jeff Verheggen and Verheggen Snr in the matter. There is no indication in the minutes that any directors of the Company did not participate in discussion about, or vote on, the resolution approving these terms. However Langoulant and Jeff Verheggen have told us that Jeff Verheggen did not vote on the resolution. Return

7

Referrals
 
7.1 We are referring this report to:
  1. the Registrar of Companies in relation to compliance with the requirements of the Companies Act 1993 and the Securities Amendment Act 1988;

  2. the Market Surveillance Panel of the NZSE in connection with compliance with the Listing Rules of the NZSE;

  3. the Institute of Chartered Accountants of New Zealand in relation to the audit of the financial statements of the Company by Sinclair & Wood, Chartered Accountants, Tauranga (see Volume 2 of our report);

  4. the Institute of Directors of New Zealand Inc in relation to comments about audit committees and corporate governance more generally;

  5. the statutory managers of Max;

  6. the Australian Securities and Investments Commission in relation to compliance with the Corporations Law in Australia;

  7. the shareholders of Max to help them understand the affairs and circumstances of the Company and make decisions on its next steps.

    Chariman
    Chairman

    18 January 2000
    Securities Commission
    P O Box 1179
    WELLINGTON


Glossary of Terms Used In Our Report

the Act Securities Act 1978
 
AFA Amendments et Fertilisants D'Amorique SA, French company developing fertiliser plant in France
 
AusGM Australasian Gold Mines NL, Australian gold mining company
 
the Amendment Act Securities Amendment Act 1988
 
ASIC the Australian Securities and Investments Commission
 
Briggs Peter Briggs, director of Max and of WRS Pacific
 
Cassim Salim Cassim, Malaysian businessman, substantial security holder in Pica Corporation
 
the Commission the Securities Commission
 
the Company Max Resources Limited (In Statutory Management)
 
CR2I Conception Realisations Industrielles et Immobilieres, French company constructing fertiliser plant for AFA
 
Czechowski Edmund Czechowski, director of Max
 
the French Venture an organic fertiliser processing venture in France in which Max was involved.
 
Horwath Report Independent review of the affairs of Max by Horwath, Chartered Accountants, of Perth, commissioned by McShane and Johnson
 
Intrepid Intrepid Mining NL, Australian incorporated mining company listed on the ASX, renamed to "Cobra Resources NL" on 23 March 1998.
 
Jeff Verheggen Josephus Jeffery Verheggen, former director of Max
 
Johnson Thomas William Johnson, former director of Max
 
KPMG KPMG Corporate Pty Limited, Perth, chartered accounting firm retained to prepare appraisal report on the French Venture
 
Langoulant Michael James Langoulant, former executive director of Max
 
Lunt Trevor Lunt, former employee of Max and of WRS Pacific
 
McLernon Group Australian private investigation firm, commissioned by McShane and Johnson in March 1998 to investigate Max's affairs
 
McShane Robert Ivan Owen McShane, former director of Max
 
Max Max Resources Limited (in Statutory Management), New Zealand incorporated listed company
 
Myles Nominees Myles Nominees Pte Limited, a wholly owned subsidiary of Pica Corporation
 
NZSE New Zealand Stock Exchange
Panel Market Surveillance Panel of the NZSE
 
Pica Corporation Pica (M) Corporation Berhad, a company listed on the Kuala Lumpur Stock Exchange
 
Skidmore Robert Skidmore, employee of Max
 
Statutory managers John Anthony Waller and Colin Thomas McCloy, partners of PricewaterhouseCoopers, chartered accountants, appointed on 31 August 1998 as statutory managers to Max by Order in Council under section 38 of the Corporations (Investigation and Management) Act 1989
 
Verheggen Snr Josephus Theodorus Herbertus Verheggen, former director of Max, father of Jeff Verheggen
 
WRS Waste Recovery Systems, the business of processing organic fertiliser
 
WRS Europe WRS Europe Limited, French registered company, formerly owned by Verheggen family, agreed to subscribe for 87% of AFA after share issue by AFA in August 1996, sold in November 1996 to Max
 
WRS Pacific WRS Pacific Pty Limited, company formerly owned by Briggs, Lunt, and Skidmore which held 87% interest in AFA until AFA agreed to increase its capital in August 1996 by issue of shares to WRS Europe
 
Wyllie Bill Wyllie, shareholder in TPIC Limited, a shareholder in Max