The recent New Zealand High Court case involving Guinness Peat Group Plc and Perry Corporation raises some important issues in relation to equity swaps and will have important implications for anyone who wishes to make derivative-style investments in New Zealand. The case centred on the disclosure requirements for substantial security holders in public companies. New Zealand securities legislation provides that any person with certain specified interests (relevant interests) in more than 5% of a public company's shares must make disclosure of those interests.

Background
Perry held a large number of shares in Rubicon Limited, a listed public company. In May 2001, Perry entered into equity swaps in respect of a number of those shares with Deutsche Bank and UBS Warburg (using ISDA standard form documentation). Under the equity swaps, Perry sold the shares to Deutsche and UBS Warburg outright, retaining only an economic exposure to the shares under the swap arrangements. Deutsche and UBS Warburg both retained the shares, although Perry had no right to require them to do so, and no right to require redelivery of the shares on termination of the swaps, as the swaps provided for cash settlement. After entering into the swaps, Perry gave notice in accordance with the relevant law that it had ceased to be a substantial security holder in Rubicon. Deutsche and UBS Warburg also filed substantial security holder notices showing their holding of shares.
GPG conducted an overnight raid for Rubicon shares in July 2002, seemingly unaware of the equity swap arrangements.
GPG then issued proceedings against Perry in August 2002 claiming that Perry had retained a relevant interest in the shares held by Deutsche and UBS Warburg and that, rather than disclosing a reduction in its shareholding, Perry should have disclosed the changed nature of that relevant interest.

Judgment
Importantly, the Court decided that, by themselves, the equity swaps did not create a notifiable interest in the underlying shares for Perry. However, the Court inferred from a number of circumstances the existence of a separate arrangement or understanding' between Perry and the other equity swap parties whereby Perry would have the power to reacquire the shares. The Court considered this arrangement sufficient to create a relevant interest under the Act. This was so, even though the Court could not determine the terms of the arrangement or understanding, or by whom or how it was reached.
The Court held that Perry had breached the Act by failing to disclose the nature of that relevant interest. Perry was ordered to forfeit approximately NZ$8m (US$4.67m) worth of its Rubicon shares and to sell down approximately NZ$16m (US$9.35m) worth of its Rubicon shares a stiff penalty.

Implications
The decision highlights the need to ensure that parties to equity swaps and other derivatives involving shares in New Zealand public companies act entirely consistently with the written word of the underlying agreements and avoid any separate arrangements or understandings.