Significant company law changes moved one step closer last week when the Commerce Committee (Committee) reported back on the Companies and Limited Partnerships Amendment Bill (Bill).
The Bill proposes important amendments to the Companies Act 1993 (Companies Act) and the Limited Partnerships Act 2008 including:
- the criminalisation of breaches of certain directors' duties;
- new regulation of amalgamations and schemes of arrangement for companies subject to the Takeovers Code (Code); and
- the requirement for New Zealand resident directors.
Simpson Grierson made submissions on the draft Bill in September. In this FYI we summarise our submissions and the Committee's response.
Criminalisation of directors' duties
The Bill proposes criminal liability for knowingly breaching directors' duties to act in good faith (section 131 Companies Act) and not to cause a substantial risk of serious loss to the company's creditors (section 135 Companies Act).
Our submissions expressed concern that these amendments introduced criminal sanctions for activities which did not involve dishonesty. We questioned whether the application of criminal sanctions to breaches of directors' duties would generate sufficient social benefit (in terms of deterrence) to offset the costs inherent in the risk averse behaviours that would result.
The Committee remains in favour of imposing criminal sanctions for egregious breaches of directors' duties. It has, however, acknowledged the need to maintain a balance between encouraging positive entrepreneurial behaviour and imposing clear and effective sanctions on behaviour that crosses a criminal threshold. The Committee has asked officials to give consideration to the drafting of these new offences to ensure that balance is obtained. We are looking forward to engaging with officials in this process.
Amalgamations and arrangements affecting Code companies
The Bill aims to ensure that shareholders of companies subject to the Code will not be disadvantaged if a change of control is effected under the Companies Act. This aim is achieved by prohibiting Code companies from using long-form amalgamations under Part 13 of the Companies Act. The Bill also proposes more rigorous voting thresholds and additional judicial oversight for court-approved schemes of arrangement, amalgamations, and compromises under Part 15 of the Companies Act.
We opposed these amendments, which we believe provide an unnecessary additional layer of protection for minorities, the rights of whom are already adequately protected by the Companies Act. The Committee has agreed with the provisions of the Bill as originally drafted, with some minor modifications, despite our reservations.
New Zealand resident directors
The Committee has rejected the concept of New Zealand resident agents for companies without New Zealand directors. The Bill originally required all companies to have a New Zealand resident director or agent. This would provide an identifiable individual in New Zealand who is connected to the company and could be questioned about the affairs of the company. We submitted that it would be difficult for companies to find an agent willing to take on the liability set out in the Bill (and that those companies which did find one would be faced with significant costs).
The Committee has now recommended that the requirement to have a New Zealand agent be omitted. Instead it suggests that companies should be required to have at least one director who lives in New Zealand, or who lives in a country with which New Zealand has reciprocal enforcement arrangements. The list of "reciprocal enforcement" countries has not been provided yet.
Liability will now only be imposed on those persons who are, in practice, responsible for the company's activities (the directors). This change has merit. However, if the list of reciprocal enforcement countries does not include all of New Zealand's main trading partners, the Bill could discourage quite legitimate business activities.
Other legislative amendments
The Bill also includes additional requirements which were not included in the previous draft. Prior to incorporation, companies must provide information to the Companies Registrar relating to their ultimate holding company. Companies and limited partnerships must also provide the date and place of birth of (respectively) directors and partners.
The Bill represents a significant change to fundamental aspects of New Zealand's corporate landscape. We remain concerned that the proposed amendments may damage New Zealand's deserved reputation as an easy and efficient place to conduct business. We will continue to press for appropriate changes before the Bill passes into law.