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TTK - Waiver from NZSX Listing Rule 7.3.2(b)

4:08pm, 26 Nov 2012 | WAV/RULE

23 November 2012

NZX Regulation Decision
TeamTalk Limited
Application for Waiver from NZSX Listing Rule 7.3.2(b)

Background

1. TeamTalk Limited (“TTK”) is a Listed Issuer with ordinary shares Quoted on the NZX Main Board.

2. On 2 November 2012, TTK and the shareholders (the “Vendors”) of BayCity Communications Limited (“BayCity”) entered into a Share Sale Agreement pursuant to which TTK will, subject to the fulfillment of certain conditions, acquire all of the shares in the capital of BayCity for a consideration consisting partly of cash and partly of ordinary shares in the capital of TTK (the “Proposed Transaction”). BayCity and its subsidiaries together trade under the name “Farmside” (the “Farmside Group”).

3. The basic structure of the Proposed Transaction is that on settlement, in exchange for all of the ordinary shares in BayCity, TTK will:

(a) Pay to the Vendors in cash the sum of $19 million less an amount equal to the borrowed money indebtedness of, and transaction costs incurred by, the Farmside Group at the settlement date; and

(b) Issue to the Vendors ordinary shares in the capital of TTK having a value of $12 million, calculated with reference to the volume-weighted average price of shares in TTK over the 20 Business Days prior to the announcement by the TTK of the Proposed Transaction.

4. There is also an earn-out component of the purchase price based on the results of the Farmside Group for the years ending 31 March 2013 and 31 March 2014. Under the earn-out, if:

(a) The Farmside Group’s EBITDA for the year ending 31 March 2013 is greater than $6,600,000, then TTK will pay the Vendors earn-out consideration of $8.75 for each dollar of EBITDA in excess of $6,600,000 up to a maximum earn-out consideration of $7 Million, payable in cash (the “2013 Earn-out Consideration”); and

(b) The Farmside Group’s EBITDA for the year ending 31 March 2014 is greater than $13,000,000, then TTK will pay the Vendors additional earn-out consideration (the “2014 Earn-out Consideration”) based on the Farmside Group’s EBITDA, to a maximum of $11.05 million, less any 2013 Earn-out Consideration already paid.

5. The first $7 million of earn-out consideration that is payable will be payable in cash. The balance, if any, will be paid by the issue to the Vendors of ordinary shares in the capital of TTK having a value of up to $4.05 million, calculated with reference to the volume-weighted average price of shares in TTK over the 20 Business Days prior to 31 March 2014 (the “Earn-out Shares”).

6. Under the terms of the Share Sale Agreement there is a cap on the total number of Earn-out Shares that can be issued to any of the Vendors and their “Associated Persons” in terms of the Takeovers Code if, as a result of the issue, those persons would own 20% or more of TTK’s shares. Any balance of the 2014 Earn-out Consideration will be paid in cash.

7. TTK will seek shareholder approval for the Proposed Transaction and related financing, as each is a major transaction. In addition, both the initial issue of shares and the issue of the Earn-out Shares (if any) will require the approval of shareholders by ordinary resolution pursuant to NZSX Listing Rule (“Rule”) 7.3.1(a) (the “Shareholders’ Resolution”).

8. Rule 7.3.2(b) requires shares to be allotted within 12 months from the date of the Shareholders’ Resolution approving the issue of shares under Rule 7.3.1(a).

Application

9. TTK has applied to NZX Regulation (“NZXR”) for a waiver from Rule 7.3.2(b) to enable it to issue the Earn-out Shares to the Vendor after the expiry of 12 months from the date of the Shareholders’ Resolution.

10. In support of its application TTK makes the following submissions:

(a) Applications for waivers of Rule 7.3.2(b) have been considered on numerous occasions by NZXR in the past. The most recent example TTK has sighted is the decision in respect of Claridge Capital Limited (“CLA”) dated 20 September 2012 relating to the issue by CLA of earn-out shares (the “CLA Earn-out Shares”), in connection with the acquisition of SeaDragon Marine Oils Limited;

(b) As with the present application, the issue of the CLA Earn-out Shares was dependent upon the target company achieving certain financial targets, which would not be known within the 12-month period following shareholder approval of the issue. At paragraph 13(a) of its decision, NZXR stated that:

i. “The purpose of Rule 7.3.2(b) is to ensure that Issuers do not unduly delay the issue of securities for which they have received approval. This mischief is not present where the shares to be issued in the future are determined by an objective formula which requires the Earn Out Shares … to be issued within approximately 2 years of the Shareholder Resolution.”

(c) TTK submits that the circumstances in this instance are identical in all material respects.

(d) As with CLA’s application:

i. NZXR will have the opportunity to review and approve TTK’s Notice of Meeting to ensure that the period within which the Earn-out Shares may be issued is clearly and prominently stated;

ii. TTK’s shareholders will have the opportunity to consider whether to approve the issue of the Earn-out Shares on those terms;

iii. The issue of the Earn-out Shares will be based on an objective formula which will be disclosed to shareholders at the time shareholder approval is sought; and

iv. The waiver and TTK’s reliance on the waiver will be apparent to future TTK shareholders as it will be disclosed in TTK’s annual reports for the period within which TTK is reliant on the waiver;

(e) We note that NZXR has granted similar waivers in the past, including to Infratil Limited (13 July 2011) (redemption of bonds by the issue of shares), NZ Farming Systems Uruguay Limited (18 February 2008) (payment of management fees by the issue of shares) and The Warehouse Group Limited (5 February 2007) (issue of “Conditional Rights” to certain senior executives).

Rule 7.3.2(b)

11. Rule 7.3.2(b) provides that:

“An issue authorised by resolutions passed pursuant to Rule 7.3.1(a) shall be completed…

(b) in all other circumstances, within twelve months after the passing of those resolutions.”

Decision

12. On the basis that the information provided to NZXR is full and accurate in all material respects, NZXR grants TTK a waiver from Rule 7.3.2(b), so that it may issue the Earn-out Shares after the expiry of 12 months from the date of the Shareholders’ Resolution.

13. The waiver in paragraph 12 is granted on the following conditions:

(a) the precise terms and conditions of the issue of the Earn-out Shares, including in particular the period within which they are to be issued, are clearly and prominently disclosed in the Notice of Meeting relating to the Proposed Transaction;

(b) the Notice of Meeting clearly states that this waiver has been granted and the effect of this waiver; and

(c) this waiver and the timeframe within which the Earn-out Shares will be issued are disclosed in the annual report for the period within which the waiver is relied upon.

Reasons

14. In coming to this decision, NZXR has considered the following matters: 


(a) The purpose of Rule 7.3.2(b) is to ensure that Issuers do not unduly delay the issue of securities for which they have received approval. This mischief is not present where the number of shares to be issued in the future is determined by an objective formula, and the terms of the agreement require the Earn-out Shares to be issued within approximately 1.5 years of the Shareholders’ Resolution;

(b) NZXR will have the opportunity to review and approve TTK’s Notice of Meeting to ensure that the period within which the Earn-out Shares may be issued is clearly and prominently stated and TTK shareholders will have the opportunity to consider whether to approve the issue of Earn-out Shares on those terms;

(c) The number of Earn-out Shares to be issued will be based on an objective formula which will be disclosed to shareholders at the time shareholder approval is sought for the issue of the Earn-out Shares; and

(d) The waiver and TTK’s reliance on the waiver will be apparent to future TTK shareholders as it will be disclosed in TTK’s annual report for the period in which TTK relies on the waiver.

ENDS.