It is unlawful for an employer in New Zealand to discriminate against employees on any prohibited grounds of discrimination, including gender and age. Any employee share scheme should therefore be carefully scrutinised for compliance with these requirements.

A potentially discriminatory employee share scheme was considered by the High Court in a recent case In Re Sinclair Knight Merz Limited [2013] NZHC 31.

Under Sinclair Knight Merz Group's group-wide shareholding plan, senior employees of companies in the group were offered the opportunity to purchase shares in the group. The plan was arguably discriminatory on the basis of age, as it required the progressive disposal of an employee's shares after they turned 60, and prevented employees over 60 from receiving further shares in the group company. The aim of this was to facilitate the transfer of share ownership from more senior employees to newly promoted employees.

To resolve this concern, Sinclair Knight Merz NZ proposed a scheme of arrangement whereby employees with a potential claim (the “affected group”) would release their rights in return for a cash payment and, for those still employed by Sinclair Knight Merz NZ, an unsecured contingent value loan note. Sinclair Knight Merz NZ then applied to the High Court for approval of the scheme of arrangement under Part 15 of the Companies Act.

A scheme of arrangement is, in short, is a statutory mechanism which allows a court to order that an arrangement binds the company's shareholders and creditors. When a company applies for approval of a scheme of arrangement, such as an employee share scheme, the court looks to whether the company has complied procedurally with the relevant statutory provisions as to meetings and resolutions. The court also considers whether the scheme has been fairly put before the affected class concerned and that that class was fairly represented during consultation. The overriding consideration is whether the scheme is such that an honest and intelligent member of the affected class might reasonably approve it.

In determining the outcome of Sinclair Knight Merz NZ's application, the court noted that Sinclair Knight Merz NZ had complied with all statutory requirements as to meetings and resolutions, and the scheme had been put fairly to the affected group. All of the affected group voted in favour of the scheme, either in person or by proxy. Further, the court considered that the scheme was such that an intelligent and honest business person of the class concerned would vote in favour, as the compensation offered to the affected group was calculated by an external actuary and reviewed by an independent expert.

Accordingly, the court approved the scheme of arrangement and directed that the scheme be binding in accordance with its terms.