20 February 2002 Speech Notes
New Zealand Stock Exchange Restructuring Bill
THIRD reading
I move, That the New Zealand Stock Exchange Restructuring Bill be now read a third time.
This is a private bill promoted by the New Zealand Stock Exchange. Its main purpose is to provide a mechanism for the
conversion of the Exchange into a company, if its members so choose.
The Bill must be seen in the wider context of international developments, in particular the international trend for
stock exchanges to demutualise.
Exchanges as far afield as London, Sweden and Frankfurt and close neighbours such as Australia, Singapore and Hong Kong
have demutualised over the last few years. Recently the International Federation of Stock Exchanges (the “FIBV”)
reported informally that of the 52 exchanges present at its annual meeting, 15 had demutualised, 14 had member approval
to demutualise and 15 were actively contemplating demutualisation.
The Exchange sees important development advantages in demutualisation, namely in enhanced flexibility in raising
capital, enabling the Exchange to respond to rapid technological, business environment, and competition, changes to
allow it to continue to provide a relevant service to market participants.
The Finance and Expenditure Committee put a great deal of effort into its consideration of the bill and recommended
three key changes to the Bill, which have been accepted by the New Zealand Stock Exchange.
The first of these changes relates to the approval of the conduct rules of the Exchange, which comprise the rules that
govern listed entities and the rules that govern the conduct of sharebrokers. These conduct rules must be approved by
the Governor-General, on the recommendation of the Minister of Commerce, as part of the mechanism for the Exchange’s
conversion into a company. Under the changes recommended by the select committee, the Minister must recommend that the
Exchange’s conduct rules be approved unless satisfied it is not in the public interest to do so.
In addition, any subsequent changes made by the Exchange to the conduct rules may be disallowed in whole or part by the
Governor-General on the recommendation of the Minister. The Minister must not recommend that any rules be disallowed
unless satisfied that it is in the public interest to do so.
The Committee of the whole House has accepted these recommendations. The proposed approval mechanism for the conduct
rules reflects both the importance of the Exchange’s capital market to the New Zealand economy and also the importance
of the conduct rules in ensuring the efficient and effective functioning of the market.
The Bill achieves the appropriate balance between the responsibilities and concerns of the Exchange and those of the
Government. This balance is achieved on one hand by the Exchange retaining responsibility for the making and
administering of the conduct rules under the Bill, which reflects the unique position the Exchange has to assess and
respond to market practices to ensure the efficient and effective functioning of the market. On the other hand, the
Minister is given the power only to recommend non-approval of the conduct rules, or disallowance of a change to those
rules, but only if those rules would not be in the public interest.
This safeguards the public interest of ensuring that the conduct rules do not derogate from investor confidence in, and
the proper functioning of, the Exchange’s capital market. This balance is achieved by Government intervention in the
conduct rules being deliberately set at a high threshold. This high threshold ensures that an objective test is employed
and that it is not an issue of arbitrary political will. The Australian legislation strikes a similar balance in
relation to the Australian Stock Exchange, which recently has also converted from a mutual into a company.
The second key change recommended by the select committee was the imposition of a control limit on a demutualised
Exchange, again as part of the mechanism for the Exchange’s conversion into a company. Similarly, this principle of a
control limit was supported by the Committee of the House because of the significant role the Exchange plays in New
Zealand’s economy and the fact that it is the Exchange that makes the conduct rules to govern the behaviour on the
Exchange of listed entities and sharebrokers.
The recommendation of the select committee was that a control limit must be determined by the Governor-General before
the Exchange may convert into a company. The control limit must set out the highest percentage of voting rights that a
person (or associated persons) may hold or control in the company that the Exchange converts into on demutualisation.
The Bill provides for penalties should that control limit be breached.
The third key change recommended by the select committee was a change to the definition of “qualifying member” so that
it extended to members of the Exchange not only on 16 August 2000, but also on 15 February 2001 (the date of the
introduction of the Bill) or persons who applied for membership before this date that had been accepted before the first
meeting was convened to consider the restructuring proposal for demutualisation of the Exchange.
There has been much debate about the appropriate date to determine a qualifying member. While the use of any date can be
criticised as being arbitrary, I believe the select committee found a suitable path, which takes into account the
concerns of members of the Exchange who would have been excluded from the definition of “qualifying member” had this
change not been recommended. The select committee’s consideration has also appropriately ensured that members of the
Exchange on 16 August 2000 who have since left, continue to be classified under the Bill as qualifying members to
prevent those members who may have made decisions based on that date from being disadvantaged.
The Bill appropriately recognises that it is the members of the Exchange who have the right to determine future
ownership. The Bill provides an appropriate safeguard for Exchange members in that a full 75% of Exchange members
entitled to vote must approve the restructuring proposal, including the issues of qualifying members and ownership
entitlements. As also recognised by companies' legislation, a 75% majority vote is an appropriate safeguard for the
exercise of fundamental decisions of an entity. Demutualisation of the Exchange simply cannot be achieved under the Bill
without such robust levels of support.
I believe the bill has been thoroughly examined by the select committee and by the Committee of the whole House. I thank
the members of the Finance and Expenditure Committee for the hard work they put into their consideration of this Bill. I
particularly want to thank my colleague, Mark Peck, Chairman of the Finance and Expenditure Select Committee. His skill
in finding a way through the opposing arguments has been very helpful. I also want to thank Frank McLoughlin and
officials from the Ministry of Economic Development, who have given so generously of their time.
Finally, Mr Speaker, I want to thank my colleagues in the House who have supported the passage of this private
legislation at the request of the New Zealand Stock Exchange.
ENDS