The Commerce Select Committee has called for submissions on the Companies and Limited Partnerships Amendment Bill. The Bill incorporates a number of proposed reforms which have been on the Government's agenda for some time, including:
- criminalising the breach of certain directors' duties;
- prohibiting companies which are subject to the Takeovers Code from undertaking long-form amalgamations under Part 13 of the Companies Act and various changes to better align the court process for schemes of arrangements or amalgamations under Part 15 of that Act with the Takeovers Code requirements; and
- tightening requirements around company registration and company directors.
Submissions close on 6 September 2012.
Criminalising breaches of directors' duties
The proposed criminalisation of certain breaches of directors' duties is likely to be a focus of submissions.
The proposal has already been the subject of public consultation as part of the Ministry of Economic Development's 2010 "Securities Law Review" discussion paper and the consultation on the exposure draft of the Financial Markets Conduct Bill at the end of last year.
Under the Bill's changes, a director who breaches the good faith duty in section 131 of the Companies Act 1993 would commit an offence if he or she knows that the act or omission is seriously detrimental to the interests of the company; and a director who breaches the reckless trading prohibition in section 135 of the Companies Act would commit an offence if he or she knows that the act or omission will result in serious loss to the company's creditors. The maximum penalty would be five years' imprisonment or a $200,000 fine.
For discussion on some of the policy issues raised by this proposal see our submissions on the June 2010 Securities Law Review discussion paper here as well as our earlier articles: Criminal sanctions – doing business under threat of prison and New enforcement powers for FMA and criminal liability for breaches of directors' duties on the horizon.
New proposals for amalgamations and schemes of arrangement by "code" companies
The Bill also includes provisions which are intended to address the Takeovers Panel's concern about the use of amalgamations and schemes of arrangements by code companies as an alternative to a takeover offer made under the Takeovers Code. The Panel has been pressing for legislative reform on this issue since 2006 and there have been a number of rounds of public consultations over how best to meet the Panel's concerns. The Bill adopts the recommendations made by the Takeovers Panel to the Labour Government in 2008.
The proposed changes
The Bill will make the following changes to the Companies Act:
- Part 13 amalgamations prohibited: The use of long-form amalgamations under Part 13 of the Act will be prohibited where an amalgamating company is a code company.
Court process to be more aligned with Takeovers Code requirements: The court must only approve a scheme that would affect the voting rights of shareholders in a code company if:
- the court is satisfied that the shareholders of that code company would not be adversely affected by the transaction not being undertaken under the Takeovers Code; or
- the applicant has filed a "no-objection" statement from the Takeovers Panel.
The court will retain its discretion to not approve a scheme even if a "no objection" statement is provided by the Takeovers Panel.
- 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.
Two limb voting test (75% approval by each interest class and approval by 50% of the total eligible voting rights): Shareholder approval of a scheme must be 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 50% by number of those voting on the resolution). This second limb applies on an overall basis rather than by each interest class separately.
- 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.
Implications for practice
If the Bill is implemented in its current form, the key implications for practice will be:
Two choices of transaction structures: The choice of transaction structure for changes of control of code companies will be limited to:
- contractual offers under the Takeovers Code – supervised by the Takeovers Panel; and
- court-approved schemes of arrangement under Part 15 of the Companies Act – with likely Takeovers Panel involvement through the "no objection" process.
It will still be possible to undertake an amalgamation involving a code company, but that must be done under Part 15 rather than Part 13 of the Companies Act.
- Mandatory independent adviser's report: The Panel has indicated that it will expect that an independent adviser's report has been provided to shareholders before providing a "no-objection" statement.
- Ensuring requisite level of shareholder support is obtained: Greater efforts may be required to encourage shareholders to vote in relation to a scheme to ensure that the 50% threshold (of those eligible to vote) is reached. This will be a particular issue for companies with widely held share registers. This may require greater use of advertising campaigns, proxy solicitation and broker handling fee-type arrangements.
- Stakebuilding: Because of the interest class voting arrangements, stakebuilding may be of little benefit in connection with a scheme (other than for the purpose of acquiring a potential blocking stake to prevent another party from getting to the 90% compulsory acquisition threshold). In fact, stakebuilding may actually be detrimental in certain circumstances as it may magnify the stake of any dissenting shareholders.
Tightening New Zealand's registration regimes to reduce misuse by offshore operations
New "resident agent" requirement
The key measure is the proposal to amend the Companies Act to require all New Zealand registered companies to have a resident agent if they do not have a director who lives in either New Zealand or an "enforcement country".
The resident agent's role will be administrative, rather than that of a manager. Essentially, the agent will be required to ensure that the directors and the company comply with their respective statutory reporting and record-keeping obligations. A resident agent can be liable on conviction to a fine for failure to comply with his or her obligations.
A resident agent must live in New Zealand, cannot be an auditor of the company, and must be a natural person. The qualifications of a resident agent will otherwise reflect the qualifications for a director.
It is expected that this requirement will only affect a small proportion of registered companies. An exemption is proposed whereby companies which have at least one director who is resident in an "enforcement country" are not required to appoint a New Zealand-resident director or a resident agent. The "enforcement countries" will be named in regulations and are expected to include countries which have entered into information sharing arrangements with the Registrar of Companies (for example, Australia).
For further details on the resident agent requirement see Issue No. 13 of Bell Gully's Corporate Reporter.
Similar measures for Limited Partnerships
The Bill makes amendments to the Limited Partnerships Act 2008 of a similar nature to the Companies Act amendments regarding the registered agent requirement.
The amendments require a limited partnership to have a resident agent if the limited partnership does not have:
- a general partner who is a natural person living in New Zealand or in an enforcement country; or
- a general partner that is a partnership governed by the Partnership Act 1908 that has at least one partner who is a natural person living in New Zealand or in an enforcement country; or
- a general partner that is a company registered on the New Zealand register under the Companies Act. Such a company will be required by the changes to the Companies Act made by the Bill either to have a director who is resident in New Zealand or an enforcement country, or to have a resident agent.
The qualifications of a resident agent of a limited partnership are the same as for a resident agent of a company.
The Bill also addresses the current gaps in the legislation concerning qualifications for general partners. General partners who are natural persons will be required to meet qualification requirements equivalent to those set out in the Companies Act. Where a general partner is a partnership governed by the Partnership Act 1908 at least one partner must meet the qualifications.
Submission process and beyond
If you would like further information on any of the proposed changes or assistance with your submissions on any aspect of the Bill, please contact your usual Bell Gully adviser.
We will be making our own submissions on the Bill, particularly with regards to the policy concerns we have in relation to the criminalisation of breaches of directors' duties.
The Commerce Select Committee is due to report back on the Bill by 24 January 2013 and we expect the Bill to be brought into force by mid-2013. We will keep you updated with further developments.