The New Zealand Court of Appeal decision of 4 November 2003 involving Guinness Peat Group Plc (GPG) and Perry Corporation (Perry) raised important issues in relation to equity swaps and the disclosure obligations of substantial security holders under the Securities Markets Act 1988.

The case concerned the obligation of substantial security holders to disclose a 'relevant interest' in the voting securities of a listed entity. Perry held a large number of shares in Rubicon Limited. In May 2001, Perry entered into equity swaps with Deutsche Bank AG (DB) and UBS Warburg AG (UBS) in respect of a number of those shares. Perry sold the shares to DB and UBS outright, retaining only an economic exposure to the shares. Perry had no right to require re-delivery of the shares on termination of the swaps, as the swaps provided for a cash settlement. After entering into the swaps Perry, in accordance with the act, filed a notice that it had ceased to be a substantial security holder. When Perry repurchased the shares, GPG issued proceedings claiming that, contrary to the notice filed, Perry had retained a relevant interest in the shares, thus remaining a substantial security holder in Rubicon.

The High Court decided that, while the equity swaps themselves did not create a relevant interest, a number of circumstances pointed to the existence of a separate "arrangement or understanding" sufficient to create a relevant interest under the act because that arrangement gave Perry  power to re-acquire the shares. Accordingly, Perry was in breach of the act by failing to disclose that relevant interest and was stiffly penalised.

The Court of Appeal held that Perry did not breach the disclosure requirements of the Act. Although Perry had knowledge of the market reality, which was that it was likely that it would be able to re-acquire the shares so long as DB and UBS still held those shares, the court held that an "arrangement or understanding" creating a relevant interest requiring disclosure will only exist if there is some form of consensus and communication between the parties confirming that there would be an ability to repurchase. The court found no such consensus or communication in this case.

The consequence of this decision is that it appears to bring New Zealand back into line with international practice.