Summary of the Establishment and Corporate Governance Structure of Mercury Energy Limited
[ Last Updated 13 January 2006 ]
Prepared by Inquiry Secretariat
15 May 1998
1. Background - Reform of Energy Sector
The Energy Companies Act 1992 came into force on 1 July of that year. The Act provided for the formation of "energy companies" and the vesting of the undertakings of the existing Electric Power Boards in these companies.
In each case this process required the creation of an establishment plan which detailed how the undertaking of the Power Board would be vested in the energy company.
Under the Act the establishment plan was to be prepared by the directors of the existing Power Board which was described as the "Establishing Authority". This group had been appointed by the Minister of State Owned Enterprises1 The Establishing Authority was required to consult with the previously elected members of the Power Board with regard to the establishment plan. This group was appointed as "Interim Trustees" of the Power Board by virtue of section 4 of the Act.
The Minister of Energy issued guidelines for establishment plans that encompassed three broad principles:
- The proposals should be consistent with the basic aims of the reforms, which are to introduce competition and contestable ownership by establishing ordinary companies under the Companies Act preferably with fully tradable shares;
- The proposals must safeguard the future financial stability of the company. In particular, there must be provisions to ensure that the company has access to adequate capital at competitive rates and is able to raise new equity when required to ensure that equity investment is greater than long-term debt; and
- Subject to the above, proposals will be expected to reasonably reflect any clear logical preferences expressed through the local consultative process.
Once the establishment plan was agreed to and endorsed by the Interim Trustees it was to be forwarded to the Minister of Energy for his approval.
2. Establishment Plan for Mercury Energy Limited
In the case of the Establishment Plan for Mercury Energy Limited ("Mercury") , the Establishing Authority was the Auckland Electric Power Board ("AEPB") while the Interim Trustees were the previously elected members of that Board.
A working party was formed on 31 July 1992 to draft an establishment plan which would be acceptable to both groups. There was considerable debate between the Establishing Authority and the Interim Trustees and within each group as to the content of the Establishment Plan. In additional there was considerable public debate on the subject.
The draft Establishment Plan was approved by a majority (6 to 4) of the Interim Trustees on 30 October 1992. Following public consultation certain amendments were made. The Establishing Authority by a majority (4 to 1) approved the Establishment Plan on 21 December 1992. The Interim Trustees endorsed the amendments the next day by majority (6 to 4). On 23 December 1992 the Establishment Plan was forwarded to the Minister of Energy for his approval. This approval was forthcoming on 24 June 1993.
Details of the Establishment Plan, as reflected in the Articles of Association and Constitution of Mercury, will be discussed in more detail in later sections. In summary, the Establishment Plan provided for the following (amongst other things):
- The undertaking of the AEPB would vest in Auckland Energy Limited (the name of the company was later changed to Mercury Energy Limited).
- The creation of the Auckland Energy Consumers Trust ("AECT"). 300,000,000 $1 shares in the company would be held by AECT. This represented the existing undertaking of the AEPB.
- The AECT would hold sufficient shares with voting rights to control 50.5% of the ordinary voting rights of the company.
- 100,000,000 $1 shares would be offered to the public. These shares would represent 49.5% of the voting rights. The AECT would eventually hold 75% of the paid up capital of the company while the public shareholders would hold the remaining 25%.
- The AECT would appoint 4 of the 9 directors of the company. The power to appoint the remaining directors would vest in the public shareholders when the further 100 million shares were offered to the public.
The central theme of the corporate structure provided by the Establishment Plan was to treat the issues of control and ownership separately. Thus while the AECT would possess the major economic interest in the company, it would not appoint the majority of the directors of the company.
3. Formation of Mercury Energy Limited
Auckland Energy Limited was incorporated on 24 October 1990 solely for name protection purposes. The company did not trade for the next three years. The name of the company was changed to Mercury Energy Limited on 20 August 1993.
The company had initially been incorporated with 100 shares. On 15 September 1993, 94 of these shares were transferred to the AECT while 5 shares were individually transferred to 5 partners of Russell McVeagh McKenzie Bartleet & Co, the solicitors for the company. One share had been held by a partner of this law firm since incorporation. Section 41 of the Companies Act 1955 required that there be a minimum of 7 shareholders in a public company. Shares were issued to the solicitors for the company to satisfy this statutory requirement.
The undertaking of the AEPB was vested in Mercury on 1 October 1993.2 The Articles of Association, which reflected the Establishment Plan, were adopted by special resolution of the company on 15 September 1993.
Mercury was reregistered under the Companies Act 1993 on 30 June 1997. The Constitution of Mercury reflected the previous Articles of Association and the Establishment Plan.
4. Auckland Energy Consumers Trust
The AECT was created to hold majority ownership in Mercury on behalf of the consumers of electricity supplied by Mercury. The formation of the AECT was a significant feature of the Establishment Plan.
The deed which formed the AECT was executed on 27 August 1993. The beneficiaries of the income of the AECT are the consumers of electricity supplied by Mercury while the beneficiaries of the capital are Auckland City Council, Manakau City Council and Papakura District Council.
The original trustees were the Interim Trustees under the Energy Companies Act 1992 who had endorsed the Establishment Plan. Subsequently there have been two elections to appoint trustees on 1 October 1994 and 11 October 1997.
On 18 February 1996 the trustees resolved that the AECT should have the following mission statement:
"The Auckland Energy Consumers Trust as a major shareholders in Mercury Energy Limited, seeks to provide advocacy for consumers; to protect its investment under the terms of the Trust Deed; and to maximise the value of its investment for the benefit of present and future beneficiaries."
The trustees met on 15 and 16 January 1998. At this meeting the trustees endorsed the mission statement, subject to the following amplification and clarification.
- AECT confirms its commitment to its investment in Mercury Energy Ltd (MEL).
- AECT is committed to achieving the best possible value from its investment in MEL.
- AECT has a duty to protect and enhance its investment in MEL.
- AECT intends to provide advocacy for its consumers by effective representation and communication with consumers and MEL management and directors."
5. Shareholders of Mercury Energy Limited
On 15 September 1993 the capital of Mercury was increased and reclassified. The new capital structure was as follows:
- 102,020,202 Group A shares (including the 94 shares held by the AECT.)
- 197,979,798 Group B shares.
- 100,000,000 Group C shares including the 6 shares held by the partners of Russell McVeagh McKenzie Bartleet & Co.3
All the Group A and Group B shares were issued to the AECT. None of the remaining Group C shares were issued.
All the shareholders from Russell McVeagh McKenzie Bartleet & Co have executed a deed of trust and indemnity whereby they each hold their share on trust for such beneficiary or beneficiaries as the directors of Mercury specify from time to time.
Both the Group A and Group C shares attracted voting rights while Group B shares do not attract voting rights. The Articles of Association and Constitution provide that the AECT as holder of the Group A shares holds 50.5% of the voting rights. In the event that more than 100 million Group C shares are issued, Group B shares convert to Group A shares thereby ensuring that the AECT continues to hold 50.5% of the voting rights. If sufficient Group C shares are issued so that the AECT holds less than 50.5% of the total shares in Mercury, voting rights shall be on a one share one vote basis. This situation can only occur with the approval of the AECT.
6. Directors of Mercury Energy Limited
In terms of the Establishment Plan, Articles of Association and Constitution of Mercury, the AECT has the power to appoint 4 of the 9 directors of the company by virtue of its ownership of the Group A shares. Of these 4 directors, only two may be trustees of the AECT.
The ability of the AECT to appoint directors depends on the proportion of voting rights it holds through its shareholding. Currently the AECT can appoint 4 of the 9 directors. In the event that the AECT holds fewer voting rights, the number of directors it can appoint decreases as follows:
| % of Voting Rights held by AECT |
Number of Directors AECT can appoint |
| 44.4%+ |
4 |
| 33.3%+ |
3 |
| 22.2%+ |
2 |
| 11.1%+ |
1 |
The power to appoint the remaining 5 directors rests with the holders of the Group C shares. Currently these six shares are held by six professional trustees (partners in Russell McVeagh McKenzie Bartleet & Co). In terms of the deeds of trust which specifies how these shares are held, these shareholders only exercise their powers as shareholders on the instructions of the board of directors of the company.
The Establishment Plan provided for an offer to the public of the Group C shares. To date this has not occurred. In the event that it does occur, the power to appoint these 5 directors will be held by these public shareholders.
These 5 directors were initially appointed by the AEPB when the undertaking of the AEPB was vested in Mercury. This was authorised by the Articles of Association which had been approved by the Minister of Energy as part of the Establishment Plan. In addition the Establishment Plan provided for the views of the Minister to be sought as to the suitability of these directors. Three of these directors had been members of the Establishing Authority. All five of these directors remain on the board of Mercury.
7. Other Matters
a) Dividends
All three types of share rank equally in terms of dividends. The Establishment Plan, Articles of Association and Constitution all provide that for as long as the AECT holds any Group A shares, there shall be dividends paid which equates for not less than 50% of Mercury's net profit after tax.
The dividends received by the AECT are required to be distributed to Mercury's customers by the AECT.
b) Asset Protection
The Constitution provides that when Mercury intends to acquire or dispose of significant assets, or borrow to a level which would affect the company's credit rating, the written approval of the AECT must be obtained.
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