REL: 0834 HRS Rakon Limited
DISCPLIN: RAK: Public Censure of Rakon Limited by NZMDT
5 March 2014
ANNOUNCEMENT OF NZ MARKETS DISCIPLINARY TRIBUNAL
PUBLIC CENSURE OF RAKON LIMITED BY THE NZ MARKETS DISCIPLINARY TRINUBAL FOR A
BREACH OF NZX MAIN BOARD LISTING RULE 10.1.1
1. In a determination of the NZ Markets Disciplinary Tribunal (the Tribunal)
dated 24 February 2014, the Tribunal found that Rakon Limited (RAK) breached
NZX Main Board Listing Rule (Rule) 10.1.1.
2. What follows is a high level summary. The facts of this matter and the
Tribunal's detailed reasoning are set out in its decision.
3. Between March 2013 and early July 2013, RAK and Zhejiang East Crystal
Electronic Co., Ltd (ECEC), an entity listed on the Shenzhen Stock Exchange,
negotiated a possible joint venture and sale of shares in Rakon Crystal
(Chengdu) Co., Ltd (RCC) (a company indirectly owned 85.4% by RAK) to ECEC.
Details of the negotiations are contained in the Tribunal's decision on this
4. The negotiations culminated in a Cooperation Framework Agreement (the
Agreement) which expressed the "tentative" intention of RAK and ECEC to form
a strategic partnership and set out the process the parties would follow in
order to enter into a formal share transfer agreement.
5. Importantly for RAK, the Agreement provided that until ECEC paid a deposit
of US$0.5 million, the Agreement was not legally binding. RAK submitted that
this provision was deliberate - it wanted to be certain of ECEC's financial
commitment to the transaction, given the protracted and difficult
negotiations, before it became contractually bound and before an obligation
arose to advise the market.
6. On 4 July 2013 both RAK and ECEC signed the Agreement, with the approval
of the boards of both companies. The parties exchanged emails on the timing
of the announcements to NZX and the Shenzhen Stock Exchange. This
correspondence is detailed in the Tribunal's decision on this matter. RAK
believed that the announcements would not be made until it had received the
deposit from ECEC in its nominated Hong Kong bank account.
7. On 5 July 2013, NZX observed a significant price rise and increase in
trading volume in RAK ordinary shares. Initial investigations by NZX found
that ECEC had announced the Agreement to the Shenzhen Stock Exchange and that
this information was publicly available online via Chinese media from 11:42
pm (NZST) on 4 July 2013. NZX contacted RAK, which was not aware that the
announcement had been made in China. RAK ordinary shares were placed in a
trading halt at approximately 11.35 am on 5 July 2013 and at 12:17 pm on 5
July 2013, RAK announced details of the Agreement.
8. The Tribunal considered two key issues in this case:
(a) the correct interpretation of Rule 10.1.1(a)(iii)(B); and
(b) how the Rules applied in this instance.
Interpretation of Rules
9. The obligation to disclose Material Information to the market immediately
is a fundamental obligation placed on Issuers under the Rules. The Rules are
intended to ensure that the market is informed of relevant information at all
times, that New Zealand's listed capital markets are efficient, transparent
and fair, and that there is equality of information in the market.
10. The presumption in the Rules is that Material Information must be
immediately released unless an exception applies. Footnote 10 to Rule 10.1.1
notes that "An Issuer should also be guided by the principle that if in doubt
it should disclose the information".
11. The Rules permit some exceptions to the fundamental obligation to
disclose, known as the "safe harbour" provisions. The exception in Rule
10.1.1(a)(iii)(B) of "an incomplete negotiation or proposal" is intended to
ensure that parties are not forced to disclose information to the market at a
time when it may prejudice ongoing negotiations and to ensure that a proposal
is not required to be announced prematurely, which could mislead the market
or cause uncertainty.
12. In the Tribunal's view, a proposal or negotiation can be complete for the
purposes of Rule 10.1.1(a)(iii)(B) before it becomes legally binding.
13. The Rules do not explicitly require a legally binding commitment. The
language used within the exception contemplates a broader range of situations
where a proposal or negotiation may be complete.
14. The Tribunal notes that it is important to ensure that the Rules are
interpreted with reasonable consistency and predictability and that there is
a "clear line" to inform Issuers on when disclosure is required. Generally
speaking, this "clear line" is when both parties sign an agreement.
Application of the Rules
15. Both parties agreed that the Agreement was Material Information and that,
as soon as details of the Agreement were made public via Chinese media on 4
July 2013, confidentiality was lost and disclosure of the Agreement by RAK to
NZX was required.
16. The matter on which NZX and RAK disagreed is whether the Agreement had
ceased to be "an incomplete proposal or negotiation" before it was announced
17. NZX contended that, at the point the Agreement was signed by both RAK and
ECEC, it ceased to be "an incomplete proposal or negotiation" and should
therefore have been announced. RAK contended that the Agreement was
"incomplete" up until the time the deposit was paid because until that time
the Agreement was not legally binding.
18. The Tribunal found that the Agreement was complete at the time of
execution by the parties on the evening of 4th July 2013, and was required to
be immediately disclosed by RAK at that time - in practice this should have
occurred before the market opened in New Zealand on 5 July 2013.
19. The Tribunal noted that the Agreement was unusual (RAK submitted that
both parties had the right to re-open negotiations up until the time the
deposit was paid). However, the Tribunal considered that the Agreement was
complete at the time of execution by both parties. While the payment by ECEC
of the deposit was required in order for the Agreement to become "legally
binding", the Tribunal considered that the Agreement was nevertheless
"complete" for the purposes of Rule 10.1.1(a)(iii)(B), as reflected by the
approval of both boards and the execution of the Agreement by both parties.
20. In determining the appropriate penalty to impose the Tribunal considered
the matters prescribed in Tribunal Rule 11.16.1, including the conduct of RAK
over the previous 24 month period, the severity of the matter, any benefit
obtained or detriment suffered as a consequence of the breach, the
reputational impact of the penalty being imposed and any other mitigating
Conduct of RAK
21. There was no suggestion that RAK deliberately breached the Rules. RAK
considered that, until the deposit was received in cleared funds, no
disclosure was required. It was mindful of its obligations under the Rules
and sought to ensure a co-ordinated release of announcements with ECEC upon
its receipt of the deposit. The Tribunal notes that, as soon as RAK was
advised by NZX that the Agreement had been announced by ECEC, RAK took the
appropriate steps and released an announcement as required. The Tribunal
also notes that this is the first occasion a breach by RAK has been referred
to the Tribunal.
22. RAK submitted that the uncertainty as to whether ECEC would pay the
deposit meant that announcing the Agreement before it was paid could have
misled the market. However, the Tribunal considered that an announcement
could have been worded appropriately to ensure the market was aware of the
23. RAK advised the Tribunal that the Agreement was governed by the laws of
the People's Republic of China (PRC), but that it had not sought any advice
in relation to PRC law, including on when the Agreement would become legally
effective under that law. It also appears that RAK did not make any
enquiries of ECEC as to ECEC's disclosure obligations under the rules of the
Shenzhen Stock Exchange.
Severity of the breach
24. Any breach of the continuous disclosure provisions of the Rules is a very
serious matter and any such breach should be considered severe. Such a
breach falls within penalty band 6 of the Tribunal's Procedures, indicating
that a penalty of up to $250,000 for a matter considered under the Summary
Hearing Procedure is appropriate.
25. The Tribunal notes that the duration of the breach - around 1.5 hours -
was particularly short. However, this was due to NZX having discovered the
online Chinese media reports, rather than any precautionary measures taken by
RAK to ensure it became aware of any leaks.
26. The Tribunal also notes that the information was particularly "material",
with the sale of the RCC shares constituting a significant transaction which
required RAK shareholder approval under the Rules.
Benefit obtained/detriment suffered
27. RAK submitted that any potential detriment to RAK shareholders was small.
The Tribunal was not provided with trading information in order to determine
the total possible loss, but accepted this amount was unlikely to have been
28. The Tribunal notes that any ruling against an Issuer is likely to be
detrimental to its market reputation. The Tribunal takes its
responsibilities very seriously and is very mindful of the possible
consequences to an Issuer of adverse findings.
Other mitigating factors
29. RAK submitted that it has and had internal processes in place to ensure
compliance with Rule 10.1.1. The Tribunal noted that it was clear that RAK's
senior management and Board were aware of the need to announce the Agreement
and sought to manage the timing of the announcements by RAK and ECEC.
30. The Tribunal imposed the following penalties:
(a) A public censure in the form of this announcement;
(b) An order that RAK pay $30,000;
(c) An order that RAK pay the actual costs and expenses incurred by the
(d) An order that RAK pay the actual costs and expenses incurred by NZX.
31. The Tribunal is a disciplinary body independent of NZX and its
subsidiaries. The Financial Markets Authority approves its members. Under
the Tribunal Rules, the Tribunal determines and imposes penalties for
referrals made to it by NZX in relation to the conduct of parties regulated
by the market rules.
End CA:00247824 For:RAK Type:DISCPLIN Time:2014-03-05 08:34:35