The Minister of Commerce and Consumer Affairs, Hon Andrew Bayly, announced last week that the Government has recently agreed to progress a package of reforms modernising the Companies Act 1993 (Act) and other related corporate governance legislation. These reforms are intended to make New Zealand an easier and safer place to do business.
The reforms will take place in two stages:
- Phase One: The first phase of reforms is intended to modernise the "out-of-date" Act, simplify compliance requirements, and deter poor and illegal business practices. The Bill introducing the Phase One reforms is expected to be introduced in early 2025. Please see below for further detail about the Phase One reforms.
- Phase Two: The second phase of reforms will also commence in 2025 (in parallel to the Phase One reforms) with a review by the Law Commission of directors’ duties and related issues of director liability, sanctions and enforcement more generally. The review will consider the issues raised in the Mainzeal case, in addition to other related issues.
The Phase One Reforms
The key proposed Phase One reforms include:
Modernisation, simplification and digitalisation of the Act
Given the Act was first introduced over 30 years ago, and there have been limited occasions of review and amendment on some specific provisions only, elements of the Act are now outdated and it is proposed that they be updated to better reflect the current business environment and technological advancements. These changes are intended to reduce complexity and compliance costs. In particular, the following key changes to the Act have been suggested:
- Share capital reduction process: At present, aside from conducting a share buy-back in accordance with the usual provisions of the Act, the only alternative route for a company to reduce its share capital is to obtain court approval (which is a costly and time-consuming process). It is proposed that provisions be included in the Act (similar to those included in the equivalent Australian legislation) to provide for an alternative process to reduce the share capital of a company on a pro rata basis which does not require court approval, and instead will be subject to board and shareholder approval.
- "Major transaction" definition: It is proposed that the definition of a "major transaction" in the Act be amended to:
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- exclude transactions relating solely to the capital structure of a company (share issuances, share buy-backs, dividends and redemptions); and
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- capture transactions that may not previously have been caught due to being structured through a related series of transactions (although, we consider that it has previously been established in case law that a related series of transactions would be captured within the relevant section – if it could be established that the transactions in question were, in fact, a related series). There is also discussion in the Cabinet paper of changing the application of the section so that it applies on a look-through basis to a group of companies based on the consolidated assets of the group – in the Act as it currently operates, the approval requirement is on a company by company basis which means that transactions at a subsidiary level may not require approval of the parent's ultimate shareholders.
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- Extending the availability of the section 107 shareholder unanimous consent process: Where all shareholders agree to certain corporate actions set out in section 107 of the Act, such actions can be conducted in a relatively straightforward manner (for example, share buy-backs, financial assistance and share issuances). It is proposed that section 107 be extended to also capture the following transactions which appear appropriate for inclusion in the unanimous consent regime:
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- the issuance of options or convertible securities;
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- crediting unpaid share capital; and
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- the acquisition of shares to be held as treasury stock.
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- Introduction of a process to address unclaimed dividends: At present, the Act does not include a process to deal with unclaimed dividends in the event that a shareholder cannot be contacted. It is proposed that the Act be amended to authorise the company to mingle the unclaimed dividends with the company's other funds after a two-year period has passed and reasonable efforts have been made to contact the shareholder. The shareholder would still have a claim to such dividend.
Introduction of unique identifiers and changes to residential address requirements
In order to address poor and illegal practices (such as "phoenixing") it is proposed that unique identifiers be assigned to directors and general partners of limited partnerships. The introduction of unique identifiers will also result in directors and shareholders having the ability to include an address for service, as opposed to their residential address, on the publicly accessible Companies Register. This amendment will be welcomed by many directors and shareholders as it resolves the safety and privacy concerns associated with director and shareholder residential addresses being publicly available, which we have submitted on extensively.
- For completeness, we note that the Companies (Address Information) Amendment Bill, introduced by Hon Dr Deborah Russell, is currently before the Select Committee. Given the news of the above reforms which proposes to cover the matter of directors' residential addresses being publicly available, we anticipate that the Members' Bill will be superseded by a Government Bill. Hon Dr Deborah Russell has indicated that she would withdraw her Bill, assuming an adequate solution was introduced.
Insolvency law improvements
In 2015, the Insolvency Working Group was established to review certain aspects of insolvency law in New Zealand. Some of the recommendations were adopted, however, a number were not. It is proposed that the recommendations that were not adopted are now adopted (such as the extension of the claw back period to four years for transactions conducted with related parties prior to liquidation).
New Zealand Business Number (NZBN) uptake improvements
The NZBN was introduced to enable business interactions to be more efficient by pre-populating business information – this is particularly relevant for business survey information and we understand that there is an intention to use this to make surveys shorter and more targeted. The NZBN also helps to reduce scams and can be used to verify a business' identity. In order realise the full benefit of the NZBN, the NZBN must be used widely and the NZBN Register would need to improve. To achieve this, various amendments to the New Zealand Business Number Act 2016 are proposed (such as making owner and director names publicly available by default and adding bank account names to the NZBN Register for cross-checking purposes).
For more information about the reforms, please visit the dedicated Ministry of Business, Innovation and Employment webpage here which includes links to the Cabinet Paper and associated documentation.
Once the Bill introducing the Phase One reforms is introduced and referred to the Select Committee, we can expect public submissions to open.
Please get in touch with one of our experts if you wish to make a submission, or for further information about the reforms.