Yesterday two Bills (which were formerly part of the Companies and Limited Partnerships Amendment Bill) passed their third readings and are expected to receive Royal assent soon.
The Companies Amendment Bill (No.4) deals with a range of policy issues that have been on the Government’s agenda for some time. These include:
- strengthening the rules applying to the registration of companies (which includes a new ‘resident director’ requirement for new and existing companies) and ongoing information requirements following concerns over New Zealand's registration regime being misused by offshore criminal operations;
- introducing provisions to assist in meeting New Zealand's obligations as a member of the international Financial Action Task Force on Money Laundering (FATF);
- aligning the Companies Act 1993 provisions which allow companies subject to the Takeovers Code to undertake schemes, amalgamate or otherwise reorganise their capital more closely to the requirements of the Takeovers Code; and
- introducing into the Companies Act 1993 new criminal offences relating to breaches of directors’ statutory duties to address perceived gaps in New Zealand’s enforcement regime regarding dishonest actions on the part of directors.
Although the policies behind most of the amendments are directed at a small percentage of companies, the resulting amendments to the Companies Act will impact on all companies. Details of the key changes for companies and the timing of those changes are discussed in Part 1 of this update.
The Limited Partnerships Amendment Bill (No.2) includes similar measures to address the policies regarding tighter registration requirements and compliance with the FATF Recommendations for limited partnerships, and also introduces new legislated qualifications for general partners. These amendments are discussed in more detail in Part 2 of this update.
PART 1: KEY CHANGES TO THE COMPANIES ACT 1993
New criminal offences for directors
The Companies Amendment Bill (No.4) amends the Companies Act to create two new criminal offences:
- Offence for serious breach of a director’s duty to act in good faith and in the best interests of the company: It will be an offence for a director to exercise powers or perform duties in bad faith towards the company, believing that such conduct is not in the best interests of the company, and knowing that the conduct will cause serious loss to the company. This is a new standalone offence under section 138A of the Companies Act.
- Offence for dishonestly allowing an insolvent company to incur debts: It will be an offence for a director to dishonestly fail to prevent the company from incurring a debt when the director knows that the company is insolvent or will become insolvent by incurring the debt. This offence is incorporated into the existing provision for carrying on business fraudulently under section 380 of the Companies Act.
Both offences come into effect the day after the Bill receives Royal assent. The offences will be punishable by up to five years’ imprisonment or a fine of up to $200,000.
For further details on the background to these new offences and commentary on their likely impact see our earlier client update: Criminalisation of directors’ duties – the final outcome.
The ‘resident director’ requirement
One of the key changes to the Companies Act is the introduction of a requirement for every New Zealand incorporated company to have:
- a director who lives in New Zealand, or
- a director who is also a director of a company incorporated in, and who also lives in, a country with which New Zealand has reciprocal enforcement arrangements (an “enforcement country”).
This requirement will not take effect until 365 days after the date the Bill receives Royal assent (unless the requirement is brought into effect earlier by an Order in Council). At the time the requirement comes into effect, existing companies will have a further 180 days to comply with this requirement.
In the Commerce Select Committee’s report on the Bill, the Committee indicated that this requirement would provide a broad, practical, non-technical test for the Registrar of Companies to apply. According to the Committee, a person would not be required to be a New Zealand citizen or to hold an appropriate visa before they could be a director who lives in New Zealand, although they did note that the person’s residence status would probably be relevant to the Registrar’s consideration in appropriate cases.
As yet, there has been no indication on which countries will be prescribed as an ‘enforcement country’ for the purposes of this requirement. Australia, however, has been mentioned as an example of an ‘enforcement country’ in so far as it has reciprocal arrangements with New Zealand for the enforcement of low-level criminal fines. If a company does rely on this provision, it must include information (which is still to be prescribed in regulations) in its annual return in respect of the company or companies in an enforcement country of which the director is a director.
Other key registration and information requirements
Further key requirements which will come into effect 365 days after the date the Bill receives Royal assent (unless the requirement is brought into effect earlier by an Order in Council) for companies are:
- Directors’ date and place of birth information: A requirement for directors to supply their date and place of birth information (together with their residential address) at the time of registration of a company, on any change of their directorship, and on the registration of an amalgamation proposal.
The purpose behind this new requirement is to improve the ability of the Registrar of Companies to ensure that the Registrar is dealing with the correct individual. The Registrar is required to treat the information as confidential and not make it available to the public. The information can also not be obtained under the Official Information Act 1982.
- Details of a company’s ultimate holding company: A requirement that the name of a company's ultimate holding company, if it has one, is disclosed at registration of the company and kept up to date. Details of the holding company’s country of registration, registration number or code, and registered office must also be provided. This information will be publically available through inspection of the company’s records.
Existing companies will also have to comply with the above requirements when they come into effect, although the actual time and manner in which the information is to be provided is still to be determined by the Registrar of Companies.
Enhanced powers for the Registrar of Companies
In order to ensure that the Registrar of Companies can take effective action (including investigations and consequent administrative action) where there are concerns that a company is not being used for legitimate business reasons, the Bill includes a number of additional powers for the Registrar of Companies. These powers, which will come into effect 365 days after the date the Bill receives Royal assent (unless the requirement is brought into effect earlier by an Order in Council), allow the Registrar to:
- require companies, directors, and shareholders to confirm or correct existing information on the Companies Register;
- 'flag' companies which are under investigation by inserting a note of warning in the Companies Register;
- remove a company from the Companies Register in certain circumstances;
- prohibit persons from managing companies where that person was involved in the management of a company that was removed from the Companies Register in specified circumstances; and
- to the extent necessary, extend the Registrar's investigation powers to matters where a company or its directors have not complied with the disclosure requirements of the Companies Act.
One amendment which will be of more general relevance for some companies is the enhanced powers given to the Registrar of Companies to remove a company from the register where the Registrar has reasonable grounds to believe that the company, or one or more of its directors or shareholders has failed in a persistent or serious way to comply with the Companies Act 1993 or the Financial Reporting Act 1993 (while it is still in force). Companies will need to ensure that they have a structured compliance programme in place to avoid being subject to this new power.
New powers for Registrar to identify controllers of companies
The Registrar of Companies has also been given specific powers to identify the controllers of companies in order to conform with New Zealand’s obligations under the FATF Recommendations (the internationally endorsed global standards against money laundering and terrorist financing as adopted by FATF in 2012). These allow the Registrar to ascertain from certain specified persons (including the shareholders and directors):
- who has (and anyone who has the power to acquire) a "control interest" in shares of the company; and
- "control information" relating to a company.
The term "control interest" is defined in a similar way to the definition of "relevant interest" in sections 5 to 6 of the Securities Markets Act 1988. "Control information" is defined as directions or instructions relating to the management and administration of the company or delegation of powers relating to the management and administration of the company.
Information ascertained under these provisions by the Registrar (or any person authorised by the Registrar) will be able to be used by various government agencies for specified law enforcement purposes. These include any offences under the Companies Act, the Anti-Money Laundering and Countering of Terrorism Act 2009, certain Crimes Act 1961 offences, matters relating to security under the New Zealand Security Intelligence Service Act 1969 and any similar legislation of an overseas jurisdiction.
Changes for arrangements and amalgamations of code companies
The Bill amends parts of the Companies Act relating to schemes and amalgamations for companies subject to the Takeovers Code (code companies) to align them with the Takeovers Code regime. The changes include:
- A prohibition on Part 13 amalgamations: The use of long-form amalgamations under Part 13 of the Act are now prohibited where an amalgamating company is a code company. An amalgamation involving a code company, however, can be achieved under Part 15 of the Act as a scheme. Short-form amalgamations (i.e., for intra-group reorganisations) are still permitted.
- Restrictions on court approval of a scheme: A court cannot approve a scheme that affects the voting rights of a code company unless:
- it is satisfied that the shareholders of the code company will not be adversely affected by the use of a scheme rather than the Takeovers Code to effect the change of control involving the code company; or
- a statement in writing by the Takeovers Panel that it has no-objection to the scheme is produced to the court.
This new Part 15 provision does not apply where the reconstruction of code companies does not involve a change in the relative holding or control of voting rights. For guidance on the process for applying for the no objection letter see the Takeovers Panel’s Guidance Note on Schemes of Arrangement and Amalgamations under Part 15 of the Companies Act 1993.
- Two limb voting test (75% approval by each interest class and approval by 50% of the total eligible voting rights): Shareholders may only approve a scheme by:
- a resolution approved by a majority of 75% of the votes of the shareholders in each interest class entitled to vote and voting on the question; and
- a resolution approved by a simple majority of the votes of those shareholders entitled to vote (i.e., not just 50% by number of those voting on the resolution but of all shareholders entitled to vote). This second limb applies on an overall basis rather than by each interest class separately.
- Codification of interest class tests: Legislative guidance (in the form of a new schedule to the Act) has been given for determining interest classes for the purposes of voting on a resolution to approve a scheme of arrangement. This codifies current common law principles.
- Exemption from Takeovers Code for court approved schemes: If the court approves the scheme, then the code company would be exempt from the application of the Takeovers Code.
Consequential amendments will also be made to the Takeovers Act 1993 to provide for the Takeovers Panel's new function of considering whether to provide statements of no objection under the Companies Act and the Takeovers (Fees) Regulations 2001 will now include the ability for the Takeovers Panel to charge applicants for considering whether or not to provide a no-objection statement.
These amendments come into effect the day after the Bill receives Royal assent. As such, transitional arrangements have been included in the Bill for a code company that has already begun a process to amalgamate under Part 13 of the Companies Act before the provisions come into effect. If the board of the amalgamating companies have agreed to an amalgamation, the law as it was before the amendments come into effect will apply to that amalgamation – as long as the amalgamation takes effect within a period of 180 days.
PART 2: - KEY CHANGES TO THE LIMITED PARTNERSHIPS ACT 2008
Equivalent Companies Act amendments for limited partnerships
As noted earlier many of the amendments made under Limited Partnerships Amendment Bill (No.2) are based on the same policies behind the amendments to the Companies Act. These include:
- Connection of at least one general partner to New Zealand for enforcement purposes: Ensuring that there is at least one general partner with a relevant connection to New Zealand or to an "enforcement country" by a new requirement for a limited partnership to have:
- a general partner who is either a natural person living in New Zealand or who lives in an “enforcement country” and is a director of a company that is registered in that country; or
- a general partner that is a limited partnership with at least one general partner who is either a natural person living in New Zealand or who lives in an “enforcement country” and is a director of a company that is registered in that country; or
- a general partner that is in a partnership governed by the Partnership Act 1908 that has at least one partner who is a natural person living in New Zealand or who lives in an “enforcement country” and is a director of a company that is registered in that country; or
- a general partner that is a company registered on the New Zealand register under the Companies Act; or
- a general partner that is an overseas company registered under the Companies Act with at least one director living in New Zealand or who lives in an “enforcement country” and is a director of a company that is registered in that country.
This requirement will not take effect until 365 days after the date the Bill receives Royal assent (unless the requirement is brought into effect earlier by an Order in Council). At the time the requirement comes into effect, existing limited partnerships will have a further 180 days to comply with this requirement.
As for companies, there is a new requirement that a limited partnership’s annual return must include information (which is still to be prescribed in regulations) about the company or companies in the enforcement country of which the natural person meeting the resident requirement is a director.
- Date and place of birth information: The following information must be provided in applications to become a limited partnership (and in annual returns) and must also appear on the register of limited partnerships:
- the full name and residential address of:
- every general partner who is a natural person; and
- every general partner's director, partner, or general partner who is a natural person;
- the name and address of every general partner who is not a natural person;
- the date and place of birth of:
- every general partner who is a natural person; and
- every general partner's director, partner, or general partner who is a natural person.
- the full name and residential address of:
This requirement will not take effect until 365 days after the date the Bill receives Royal assent (unless the requirement is brought into effect earlier by an Order in Council). When it comes into effect, existing limited partnerships must provide the Registrar with the place of birth of each general partner and each limited partner who is a natural person, although the actual time and manner in which the information is to be provided is still to be determined by the Registrar of Companies. Only the Registrar would be able to search the register for date and place of birth information.
Limited partnerships are also required to keep records of the new types of name and address information, including the last known such information in respect of each person who has ceased to be a partner within the last seven years.
- Registrar’s powers enhanced to identify controllers of a limited partnership: In keeping with the amendments to the Companies Act, the Registrar of Companies has also been given specific powers to identify the controllers of limited partnerships in order to comply with New Zealand’s obligations under the FATF Recommendations.
- Other enhanced powers for the Registrar: The Registrar of Companies has also been provided with powers that will allow the Registrar to:
- ascertain whether information provided to the Registrar is correct;
- issue notes of inactivity or warning against a limited partnership in the register;
- deregister a limited partnership in certain circumstances; and
- prohibit a person from being a general partner or promoter of a limited partnership in certain circumstances.
New qualification requirements for general partners
The Bill also takes the opportunity to address the fact that there are currently no legislated qualifications for general partners. Under the amendments to the Act, all natural persons who are general partners, or who are directors, partners, or general partners of a general partner, must now meet qualification requirements equivalent to those set out in the Companies Act for directors under a new section 19A of the Limited Partnerships Act 2008. General partners that are partnerships governed by the Partnership Act 1908 are covered by new section 19B, which requires at least one partner of such a partnership to meet the qualifications set out in new section 19A.
These requirements come into effect 365 days after the date the Bill receives Royal assent (unless the requirement is brought into effect earlier by an Order in Council).
Other annual return information changes
In addition to the above mentioned changes for annual returns, the Bill includes provisions requiring certain information to be included in a limited partnership’s annual return if the limited partnership has been the offeror or issuer of financial products. This requirement is based on a similar requirement for companies included in the Financial Markets (Repeals and Amendments) Act 2013, and will come into force when the relevant provisions of that Act come into force.
WHERE TO FROM HERE?
Although many of the changes outlined above will not come into effect for at least12 months, companies and limited partnerships should start now to review the implications that these changes may have on their operations, particularly with regard to internal compliance processes.