Corporate Governance 2023 Comparisons

In New Zealand, the principal forms of business organisations are:

• bodies corporate – ie, separate legal persons from their owners, including:
1. companies (formed under the Companies Act 1993);
2. limited partnerships (formed under the Limited Partnerships Act 2008); and
3. incorporated societies (formed under the Incorporated Societies Act 2022), which may not be formed for the purpose of pecuniary gain; and
• unincorporated forms – ie:
1. partnerships (formed under the Partnership Law Act 2019); and
2. trusts (formed under equitable principles, common law, and the Trusts Act 2019).

Individuals may also carry on business in their own name ‒ in which case, they are commonly referred to as “sole traders”.

The primary legislation that governs companies in New Zealand is the Companies Act 1993 (the “Companies Act”). On top of the requirements of the Companies Act, additional corporate governance requirements are imposed by:

• NZX’s Listing Rules (the “Listing Rules”) for issuers of listed securities; and
• by industry-specific legislation (eg, for banks and insurers).

In the absence of any such additional requirements, the corporate governance arrangements applicable to a company are reasonably flexible. A company may add to, negate, or modify many (but not all) of the governance provisions of the Companies Act by adopting a constitution that sets out the rules by which the company will be governed. Nevertheless, this chapter will describe the default position under the Companies Act ‒ unless otherwise indicated.

Companies that have financial products quoted on the NZX Main Board or Debt Market must comply with the Listing Rules, which impose requirements in relation to corporate governance – for example, requirements concerning the composition of the board, director remuneration, continuous disclosure, financial reporting, share issues, voting rights, and approval of major transactions.

The NZX also issues a Corporate Governance Code that takes effect on a “comply-or-explain” basis, meaning that the issuer must either comply with the recommendations made in the Corporate Governance Code or explain:

• which recommendations were not followed;
• why, and in what period, those recommendations were not followed; and
• any alternative practice adopted in lieu of those recommendations (in which case, the issuer must confirm that this practice has been approved by its board).

The NZX has recently finalised amendments to the Corporate Governance Code and these will apply for financial years commencing on or after 1 April 2023. The most significant changes relate to the determination of director independence, ESG reporting and disclosure, and disclosure of director remuneration arrangements.

Recent areas of focus for corporate governance in New Zealand include ESG reporting and climate-related financial disclosures (see 2.2 Environmental, Social and Governance (ESG) Considerations), strengthening director independence requirements, amendments to directors’ duty to act in what they believe to be the best interests of the company, and recent consultations concerning the NZX capital-raising settings and major and related-party transactions (see 3.2 Decisions Made by Particular Bodies).

Strengthening the independence criteria for independent directors of listed companies has been another focus of late. Although the recent updates to the Code include some amendments to the recommendations and commentary around director independence, an upcoming “deep-dive” review of the director independence rules is also anticipated.

The NZX is also currently reviewing its rules for capital raising, major transactions, and material transactions with related parties to ensure that the current settings provide adequate shareholder protections, as well as reflect transaction activity and international trends.

The Companies Act has recently been amended to expressly state that as part of directors’ duty to act in good faith and in what they believe to be the best interests of the company (see 4.6 Legal Duties of Directors/Officers), directors may consider matters other than the maximisation of profit, and gives as examples “environmental, social, and governance matters”. Throughout the legislative process, this amendment had attracted criticism on the basis that it is already clear that directors are free to consider matters other than the maximisation of profit, and that referring to specific matters in the Companies Act may raise questions about the weight that may be given to other matters.

The aforementioned amendments to the Corporate Governance Code – along with updates to the NZX’s ESG Guidance Note ‒ place greater emphasis on ESG factors and clarity of reporting by listed issuers on such matters. The Corporate Governance Code features a recommendation that issuers provide non-financial disclosures (including in relation to “environmental, social sustainability and governance factors and practices”) at least annually and supports the use of recognised international reporting initiatives for this purpose where appropriate to the company’s scale.

In recent years, a range of regulatory inquiries in New Zealand and Australia have emphasised the importance of institutional culture in mitigating the risk of misconduct or undesirable outcomes for consumers, namely:

• the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry;
• the Australian Prudential Regulation Authority (APRA)’s Prudential Inquiry into the Commonwealth Bank of Australia; and
• the Financial Markets Authority and the Reserve Bank of New Zealand’s joint review of the conduct and culture in New Zealand banks and the insurance industry.

The reports from these inquiries emphasised that boards of directors are expected to take ownership of organisational culture and set the “tone at the top”, as part of their wider responsibility for risk management.

The Financial Sector (Climate-Related Disclosures and Other Matters) Amendment Act 2021 makes specified disclosures concerning climate change and emissions governance, strategy, risk management and metrics/targets mandatory for a range of financial institutions (including large listed entities) for financial years commencing from 1 January 2023 onwards.

The Listing Rules require listed issuers to report the gender balance of their directors and officers, along with a performance review of the issuer’s diversity policy.

The principal bodies or functions involved in the governance and management of a company are its shareholders, its board of directors, and the company’s management team, if it has one. (It is common for boards of directors to appoint senior employees to management positions and delegate the necessary authority for managing the day-to-day affairs of the business to those senior employees – see 3.2 Decisions Made by Particular Bodies.)

Under the Companies Act, shareholder approval is required for certain significant matters such as adopting or altering the constitution, approving an amalgamation of the company with one or more other companies, commencing a voluntary liquidation, and “major transactions”. Major transactions under the Companies Act are, in broad terms, those in which the company proposes to acquire or dispose of assets, rights or interests (or incur obligations or liabilities) – the value of which is more than half the value of the company’s assets immediately prior to the transaction.

In addition, for NZX-listed entities, the Listing Rules require shareholder approval for material transactions with related parties and some categories of major transactions.

Other decisions are left to the board. The board may delegate its powers to a director, a committee of directors, an employee or any other person – although the board remains responsible for monitoring the decisions made by its delegate. There are, however, some powers that may not be delegated by the board. These are set out in Schedule 2 of the Companies Act and include issuing new shares, authorising dividends or other distributions, and acquiring the company’s own shares.

A shareholder resolution may be passed at a shareholders’ meeting (see 5.3 Shareholder Meetings) or by written resolution.

When shareholders exercise a power reserved to them by the Companies Act or the company’s constitution, the power is exercised by ordinary resolution (ie, a simple majority of votes cast on the resolution) unless otherwise specified in the relevant provision of the Companies Act or constitution. Some matters require approval by way of a “special resolution”, meaning that – if the resolution is to be passed at a meeting – a majority of at least 75% of votes cast must be obtained to pass the resolution. That threshold may be increased (but not lowered) by the company’s constitution.

For a written (circular) resolution of shareholders, the resolution must be signed by not less than 75% of the shareholders entitled to vote, who must together hold not less than 75% of the votes entitled to be cast on the resolution. A copy of such a written resolution must be sent within five working days to all shareholders who did not sign it.

Decision-Making by Directors

Directors may also make decisions by way of resolutions passed at meetings or by written resolution. Schedule 3 of the Companies Act sets out the default rules for directors’ meetings, including:

• requirements for notice (two business days);
• the required quorum (a majority of directors);
• means of attendance (in person or by audio or audiovisual communication); and
• voting (only a majority decision by directors present at the meeting is required, with each director having one vote – the chair does not have a casting vote).

The board must ensure that minutes of all directors’ meetings are kept.

Directors may also pass a written (circular) resolution. Unless the company’s constitution specifies otherwise, this must be signed or assented to by all the directors entitled to receive notice of a directors’ meeting.

Under the Companies Act, companies have a single board. Boards may appoint committees to take responsibility for particular aspects of the business or the governance of the company, and the Listing Rules require listed companies to have an audit committee. The Corporate Governance Code also recommends that listed companies have a remuneration committee and a nomination committee.

The Companies Act only provides for one class of director, meaning that all directors have the same fundamental role. However, in practice, committee memberships can mean that directors are more involved in certain aspects of the business or its governance than other areas. In addition, the company’s constitution may (if desired) specify different categories of directors. Usually, the board will elect a chair. The default position under the Companies Act is that the chair does not have a casting vote.

The Companies Act requires every company incorporated in New Zealand to have at least one director that lives in either New Zealand or an “enforcement country”. If living in an enforcement country, the director must also be a director of a body corporate that is incorporated in that enforcement country under a law equivalent to the Companies Act. At present, Australia is the only approved “enforcement country”.

The constitution of a company may increase the minimum number of directors.

The Listing Rules require listed companies to have at least three directors – two of whom must ordinarily reside in New Zealand and two of whom must be independent directors. The Corporate Governance Code further recommends that the majority of the board be independent directors. “Independence” in this context is assessed having regard to the factors outlined in the Corporate Governance Code. Broadly, however, “independent” for this purpose means directors who are free of any interest, position, association or relationship that could reasonably be perceived to materially influence their capacity to:

• bring an independent view;
• act in the company’s best interests; and
• represent the interests of the company’s financial product holders generally.

Industry-specific legislation may impose stricter obligations on the board composition of a company in that industry. By way of an example, the Reserve Bank of New Zealand’s Banking Supervision Handbook for the banking sector and its governance guidelines for the insurance sector both require at least half of the company’s directors to be independent directors.

Section 153 of the Companies Act provides that, unless varied by the company’s constitution, directors are appointed by ordinary resolution (a simple majority of votes) of the shareholders. In addition, the court has the power to appoint directors upon the application of a shareholder or creditor if there are no directors – or fewer directors than the quorum for a board meeting – and it is not possible or practicable to appoint directors in accordance with the company’s constitution. A director may be removed by an ordinary resolution of shareholders at a meeting called for purposes that include the removal of the director (in which case, the notice of meeting must state this).

These provisions may be modified by the constitution. In an incorporated joint venture, for example, it is common for each party to be able to appoint and remove a specified number of directors – regardless of whether that shareholder is entitled to exercise more than 50% of the votes at a shareholder meeting.

Directors are restrained from acting in situations where their personal interests may conflict with the interests of the company. Section 131 of the Companies Act requires a director to act in good faith and in what the director believes to be the best interests of the company when exercising powers or performing duties – see 4.6 Legal Duties of Directors/Officers.

Section 139 of the Companies Act further defines a director as “interested” in a transaction of the company if, in broad terms, the director:

• is a party to – or will or may derive a material financial benefit from – the transaction (or is a director, officer, trustee, parent, child, spouse, civil union partner or de facto partner of such a person);
• has a material financial interest in another party to the transaction; or
• is otherwise directly or indirectly materially interested in the transaction.

A director who is interested in a transaction with the company must disclose that interest to the board immediately after becoming aware that they are interested in the transaction – except where the transaction is in the ordinary course of the company’s business and on its usual terms. Such disclosure must be entered in the interests register, including the nature and monetary value of the interest or the extent of the interest (if not quantifiable). A director may disclose an ongoing interest in a named person or company, with the effect that the director will be treated as having disclosed an interest in any future transaction with that person or company.

Failure to disclose an interest does not invalidate the transaction but does allow the company to avoid the transaction at any point during the first three months following the disclosure of the transaction to all shareholders if the company did not receive fair value (based on the knowledge of the company and the interested director at the time the transaction was entered into). Where the property has been transferred on to a third party, the company’s right to avoid the transaction does not affect the title or interest of that third party if they are a purchaser for valuable consideration without knowledge of the circumstances under which the first person acquired the property.

The default position under the Companies Act is that an interested director may vote on matters relating to the transaction, be counted in the quorum, and otherwise do anything as though the director were not interested in that transaction. However, boards often adopt charters or codes of conduct that record their collective expectations as to how conflicts of interest (which may be more broadly described than the formal definition of “interested” contained in the Companies Act) will be managed. Those charters or codes of conduct commonly provide that directors with an actual or potential conflict of interest will abstain from participating in meetings and voting on matters in respect of which the conflict exists – an approach that directors of listed companies are also required to follow under the Listing Rules.

A director is also subject to restrictions on the disclosure and use of company information where that information is obtained in their capacity as a director or an employee of the company and would not otherwise be available to them. A director may, unless prohibited by the board, disclose such information to a person whose interests the director represents or a person in accordance with whose direction the director is required or is accustomed to act (see 5.2 Role of Shareholders in Company Management). These exceptions contemplate the concept of a nominee director – ie, a director nominated by a shareholder to represent its interests on the board of the company. In the latter case, the name of the person to whom the information is disclosed must be entered in the interests register.

Alternatively, a director may disclose or make use of such information if:

• the board approves the disclosure or use;
• the disclosure or use will not, or will not be likely to, prejudice the company; and
• particulars of the disclosure or use are entered in the interests register.

When a director of a company acquires or disposes of a “relevant interest” in shares issued by that company, the director must disclose to the board the number and class of shares in which the relevant interest was acquired or disposed of, the nature of the director’s relevant interest, the consideration, and the date of the transaction. That information must be entered in the interests register. A director has a relevant interest in a share if:

• the director is the beneficial owner of the share; or
• the director may exercise (or control the exercise of):
1. the power to vote; or
2. the power to acquire, or dispose of, the share.

In the case of a listed company, its directors and senior managers are required to also publicly disclose any acquisition or disposal of a “relevant interest” in the company’s (and its related bodies corporates’) quoted financial products.

A director must not trade in an unlisted company’s shares or other financial products if the director possesses information material to an assessment of the financial products’ value that they would not be in possession of but for their position as director or employee – unless the director pays no less or receives no more than the fair value of the financial products. Otherwise, the director is liable to the counterparty for the difference between fair value and the consideration.

As regards the quoted financial products of a listed company, the insider trading provisions of the Financial Markets Conduct Act 2013 (FMCA) apply instead. In general terms, these provisions prohibit persons (including directors) who have “inside information” from:

• trading quoted financial products;
• encouraging or advising other persons to trade or hold those financial products (or to advise or encourage a third person to do so); or
• disclosing the inside information.

In this context, “inside information” refers broadly to information that:

• is not generally available to the market (but that a reasonable person would expect to have a material effect on the price of the relevant financial products were it generally available to the market); and
• relates to particular financial products or issuers (rather than to financial products or issuers generally).

The principal legal duties of directors under the Companies Act are described in the following sections. Directors also have a number of administrative obligations, including those relating to disclosure of their interests and share dealings (see 4.5 Rules/Requirements Concerning Independence of Directors), as well as an obligation to supervise the maintenance of the company’s share register and obligations to ensure relevant filings are made with the Companies Office.

Section 131 – Good Faith and Best Interests of the Company

As mentioned in 4.5 Rules/Requirements Concerning Independence of Directors, a director is required to act in good faith and in what the director believes to be the best interests of the company when exercising their powers or duties. This test is subjective – ie, it relies on the director’s belief, rather than what is objectively in the company’s best interests (Madsen-Ries and Levin as Liquidators of Debut Homes Limited (in liquidation) v Cooper (2020) NZSC 100 at (113)) – although “directors will probably have a hard task persuading the court that they honestly believed that an act or omission that resulted in substantial and foreseeable detriment to the company was in the company’s best interests” (at (109)). Under a subjective test, however, “the fact that an allegedly unreasonable belief was held may (...) provide evidence that the belief was not honestly held” (at (109).

Further, “a director cannot believe they are acting in the best interests of the company if they fail to consider the company’s interests” (Smartpay Ltd v Kumar (2022) NZHC at (29)). If provided for in the company’s constitution and (in some cases) agreed to by the other shareholders, a director may act in the best interests of a parent company or – in the case of a joint venture – their appointing shareholder, even though such actions may not be in the best interests of the company. In the absence of such a provision in its constitution, the interests of a company must be considered separately from the interests of a group of related companies (Smartpay Ltd v Kumar, at (42)).

For details of recent amendments to Section 131, please refer to2.1 Hot Topics in Corporate Governance.

Section 133 – Proper Purpose

Directors must exercise their powers for a proper purpose – that is, when exercising a power conferred upon them, the director must exercise that power in line with the purpose for which it was conferred. This duty is distinct from the duty in respect of best interests, as it is possible to exercise a power for an improper purpose even if the director genuinely believed the course of action was in the best interests of the company.

Section 134 – Compliance With Companies Act and Constitution

A director may not act, or agree to the company acting, in a way that contravenes the Companies Act or the company’s constitution. A contravention of another statute would not necessarily breach this duty, but may breach Section 131 (with regard to good faith and best interests of the company) and Section 133 (with regard to proper purpose).

Section 135 – Reckless Trading

A director must not agree to the business of the company being carried on – or cause or allow the business of the company to be carried on – in a manner likely to create a substantial risk of serious loss to the company’s creditors. Whether or not a director believes the conduct of the business is reasonable is irrelevant. Directors are required to make a “sober assessment” of whether their future trading forecasts justify continuing to trade and whether the assumptions that underpin those forecasts are reasonable (Mason v Lewis (2006) 3 NZLR 225 at (51)); however, the benefit of hindsight should not be applied to directors’ decisions. If there is not a reasonable prospect of the company regaining solvency, formal insolvency mechanisms should be invoked (see Debut Homes) – it is not enough that the director’s decisions would reduce the overall deficit. Directors may not continue to trade in a way that favours one class of creditors over another.

In the long-running Mainzeal litigation, the Supreme Court has upheld the finding of the Court of Appeal that four former directors of Mainzeal (a construction company) breached Section 135 (Yan v Mainzeal Property and Construction Limited (in liquidation)). In this case, money was extracted from Mainzeal to an overseas parent company through intermediary companies that were insolvent. A director of both Mainzeal and its parent company made representations to his fellow directors that the parent company would financially support Mainzeal when it first became insolvent in a balance sheet sense. The representation was not legally binding and the parent company did not provide the support when it was needed. The directors were found to have exposed creditors to substantial risk of serious loss by continuing to trade in reliance on the non-binding representations and without a substantial capital injection. However, the court did not award compensation in respect of the breach of Section 135, because the court held that the directors’ conduct during the relevant period did not increase the aggregate loss suffered by Mainzeal’s creditors – known as the “net deterioration” approach.

Section 136 – Obligations

A director must not agree to the company incurring an obligation unless the director believes at the time, on reasonable grounds, that the company will be able to perform the obligation when it is required to do so. Indications that this belief is reasonable may include:

• the fact that the company is able to continue trading for a reasonable time following the incurring of the obligation;
• the fact that bank finance is still available to the company; and
• the fact that any downturn in the company’s performance was unexpected or sudden.

Factors that count against the belief being reasonable include incurring long-term liabilities before the business of the company has been successfully established or incurring obligations following the loss of an important revenue stream.

In the Mainzeal case, the Court of Appeal held that:

• Mainzeal had used funds owed to subcontractors as working capital in order to continue to trade;
• Mainzeal entered into large construction contracts without the company’s directors having reasonable grounds to believe it would be able to perform the contracts through to completion; and
• the directors breached Section 136 in agreeing to the company doing so.

The Supreme Court agreed with the Court of Appeal’s approach and found that compensation for breaches of Section 136 should be assessed on a “new debt” basis (ie, debt incurred once the directors did not have reasonable grounds to believe that the company would be able to perform the new obligations).

Section 137 – Duty of Care

A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances – taking into account (without limitation) the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities undertaken by them.

This section does not automatically impose a higher standard of skill on directors who hold professional qualifications in a particular area. The position may, however, be different if a director is brought onto the board to add a particular skill set.

Section 138 – Use of Information and Advice

The Companies Act expressly permits directors, when exercising powers or performing duties, to rely on reports, statements, financial data, professional and expert advice, and other information provided by:

• those (including employees, professional advisers and experts) whom the director reasonably believes to be competent in the relevant area; and
• fellow directors (or directors’ committees on which the director did not serve) in relation to matters within those directors’ or committees’ designated authority.

In each case, the director must act in good faith, have no knowledge that such reliance is unwarranted, and make proper inquiry where the need for inquiry is indicated by the circumstances.

Mainzeal Implications

The Supreme Court also noted the following implications arising out of the Mainzeal case:

• directors have a continuing obligation to monitor the performance and prospects of the company;
• where monitoring reveals the potential for substantial risk of serious loss to creditors or doubt as to whether there exists a continuing reasonable basis for the belief that obligations incurred will be able to be honoured, directors should squarely address the future of the company;
• directors may need to obtain independent expert advice and the courts will allow a reasonable time for directors to “take stock” and decide on a course of action;
• directors must deal directly with the issues giving rise to the concern, recognising that a long-term strategy of trading while balance sheet insolvent is generally not acceptable; and
• courts will apply a standard of reasonableness when assessing directors’ decisions, noting that:
1. these decisions are likely to involve the exercise of business judgement;
2. directors are often required to make complex decisions under the pressure of time with incomplete knowledge despite their best efforts, and the courts will avoid “hindsight bias” (ie, will recognise that reasonable decisions may nonetheless turn out badly and there may be more than one reasonable course of action).

All the directors’ duties described in 4.6 Legal Duties of Directors/Officers are owed to the company, rather than to shareholders. A limited set of duties is owed directly to the shareholders, including the duty to supervise the share register and the duty of directors to disclose their interests and dealings in the company’s shares.

Although directors owe none of these duties directly to creditors, Section 135 and Section 136 respectively require directors to consider whether the company’s business is being carried out in a way that is likely to create a substantial risk of serious loss to creditors and whether the company will be able to perform the obligations that it proposes to incur.

If the company became insolvent and was placed into liquidation, the liquidator could then bring an action (on behalf of the company) against a director that had breached their duties to the company. Amounts received from directors as a result would be applied for the benefit of the company’s creditors in the liquidation.

Shareholder Enforcement

A present or former shareholder may bring an action against a director for a breach of duty owed to them as a shareholder (Section 169), but may not directly bring an action against a director for breaches of duties owed to the company.

However, Section 165 allows a shareholder or director to apply to the court for leave to bring proceedings in the name and on behalf of the company. This creates an avenue for shareholders to hold directors to account for breaches of their duties to the company (and may also be used for bringing proceedings against third parties). The Section may also be used to intervene in existing proceedings for the purpose of continuing, defending or discontinuing proceedings to which the company is a party.

When determining whether to grant leave to the shareholder (or director), the court must have regard to:

• the likelihood of success;
• cost;
• anticipated level of relief;
• any action already taken to obtain relief; and
• the interests of the company in the proposed proceedings.

The court should also consider whether the applicant seeking leave may have ulterior motives other than the best interests of the company (Johnson v Johnson (2020) NZHC 1563). In Vijayakumar v Vasanthan (2021) NZHC 1827, the court noted that it was helpful in this respect to consider whether an experienced liquidator would bring the claim, given that they regularly decide whether to issue proceedings against directors.

Additionally, the court may decline an application under Section 165 if a more effective alternative remedy exists under Section 174. Leave will only be granted if the court is satisfied that:

• the company does not intend to bring, diligently continue or defend, or discontinue the proceedings itself; or
• it is in the interests of the company that the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

Sections 170 and 172 allow a shareholder to bring an action requiring a director or the company to take any action required to be taken by the directors or the company (respectively) under the Companies Act or the company’s constitution.

In any of the above-mentioned proceedings, the court may appoint a shareholder to represent all other shareholders where the shareholders have the same or substantially the same interest (Section 173). The purpose of this provision is to avoid numerous proceedings in which the dispute in each case is essentially the same.

A present or former shareholder (or any other person on whom the constitution confers the rights of a shareholder) is also entitled to take action against the company in situations where the shareholder or person considers that the “affairs of the company” have been or are being or are likely to be conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to them in that capacity or in any other capacity (Section 174). The reference to conduct of the “affairs” of a company has been interpreted broadly, encompassing any conduct that generally concerns the company. However, this does not include actions of directors or shareholders in a purely personal capacity (Van der Fluit v O’Neill (2021) NZHC 1651). Non-compliance by the company or directors with specified provisions of the Companies Act is deemed to be conduct of that kind, as is the provision of a certificate by a director without reasonable grounds for an opinion set out in that certificate. (Directors are required to certify prescribed matters in respect of decisions to, for example, issue shares or pay dividends or other distributions or so that the company can acquire its own shares.) The court may grant a wide range of remedies in response to a successful application under this provision.

What constitutes oppressive, unfairly discriminatory and unfairly prejudicial conduct was considered by the Court of Appeal in Thomas v HW Thomas Limited (1984) 1 NZLR 686 at (694). It was said in this case that the three terms were not to be read as distinct but, rather, as overlapping terms that help to explain one another. The Court of Appeal in Latimer Holdings Limited v Sea Holdings NZ Limited (2005) 2 NZLR 328 at (138) further elaborated that “unfairness requires a visible departure from the standard of fair dealing, assessed in light of the history and structure of the company and the expectations of its members”.

In Wilding v Te Mania Livestock (2017) NZHC 717, the High Court held that:

• conduct need not be unlawful to be oppressive;
• the inquiry concerns the effect of the conduct, not the intention of the parties;
• the “just and equitable” aspect means plaintiffs should not have acted wrongly; and
• remedies afforded under the section should be designed to best advantage shareholders as a whole.

A fairly calculated buyout offer made by the other parties involved may be viewed as curing unfair or prejudicial conduct (Birchfield v Birchfield Holdings Ltd (2021) NZCA 428).

Company Enforcement

The company may bring an action against one or more of its directors or former directors for breach of a duty owed by that director to the company. As the business and affairs of the company must be managed by – or under the direction or supervision of – its board, it falls to the board to decide whether such an action should be brought. If the directors do not resolve to do so (eg, if the majority of the board was complicit in the breach), a shareholder or director can apply to the court for leave to bring an action on behalf of the company in the above-mentioned manner.

Consequences

Breaches of the above-mentioned directors’ duties generally attract civil liability (although a number of the administrative provisions of the Companies Act attract criminal liability). The following are two key exceptions.

• Section 138A creates an offence for serious breaches of the duty of good faith. Such a breach will occur when a director, during the course of exercising their powers, acts in bad faith towards the company, believes that the conduct is not in the best interest of the company, and knows that the conduct will cause serious loss to the company. “In short, the offending requires dishonesty” (see Spence v R (2021) NZCA 499 at (36)).
• Section 380 creates an offence for dishonestly failing to prevent a company from incurring a debt where the director knows that the company is already insolvent or will become insolvent as a result of incurring the debt.

The court may also disqualify an individual from being a director in certain circumstances, including for persistent failure to comply with relevant laws or for acting in a reckless or incompetent manner in the performance of the director’s duties, or upon conviction of certain offences or crimes involving dishonesty.

In the course of a liquidation of the company, liquidators, creditors and shareholders also have limited powers to apply to the court to order a director (or a promoter, manager, administrator, liquidator or receiver) to repay or restore money or property under Section 301 if that person has:

• misapplied, retained, or become accountable for that money or property; or
• been guilty of negligence, default or breach of duty or trust in relation to the company.

The key enforcement avenues that are generally applied in respect of corporate governance requirements in New Zealand are described in 4.8 Consequences and Enforcement of Breach of Directors’ Duties. However, there are other potentially relevant enforcement avenues, including the following.

• The Financial Markets Authority (a regulator) may apply to the court for management banning orders that prohibit individuals from engaging in certain activities with regard to the governance and management of companies.
• The Reserve Bank of New Zealand may remove directors of licensed insurers from their positions if it is not satisfied that they are fit and proper persons to hold those positions. It may also remove directors of banks if specific criteria are met.

Limitations on Liability of Directors

Section 162 of the Companies Act allows a company to effect insurance on behalf of – and to indemnify – its directors, subject to specific limits and exclusions.

The board may authorise the payment of remuneration (or compensation for loss of office) and provision of other benefits (eg, loans and guarantees) to directors. However, before doing so, the board must be satisfied that any such action is fair to the company. Any director who votes in favour must sign a certificate to this effect that also sets out the grounds for their opinion. Such grounds must be reasonable. If these requirements are not satisfied, the director receiving the payment or other benefit is liable to the company for the payment or benefit unless they prove that it was fair to the company.

For listed companies, the Listing Rules require directors’ remuneration – and any increase in such remuneration – to be approved by ordinary resolution. Failure to do so is a breach of the Listing Rules and action may be taken in accordance with the enforcement policy of NZ RegCo (NZX’s independently governed regulatory arm). The Corporate Governance Code also recommends that listed companies have a remuneration committee – the functions of which include recommending to shareholders (for their approval) the appropriate remuneration for directors.

Directors’ remuneration (or any other benefit covered by Section 161) must be entered in the company’s interests register, which must be made available for inspection by shareholders in the company.

For listed companies, the Corporate Governance Code also recommends that issuers have a publicly available remuneration policy in which the components of director remuneration are clearly separated. Director remuneration should be fully disclosed to shareholders in the issuer’s annual report, including a breakdown of remuneration for committee roles and for fees and benefits received for any other services provided to the issuer.

A company has separate legal personality from its shareholders. Unless the company’s constitution provides otherwise, shareholders are not liable for the company’s obligations merely because they are shareholders. As such, their liability to the company is limited to amounts unpaid on their shares, liability for breaches of duty if they act as “deemed directors” of the company, recovery of unauthorised distributions, and liability provided for in the constitution (eg, for capital calls on shares).

The constitution of the company is binding as between the company and the shareholders and as between the shareholders (Section 31). It is also common for shareholders in more closely held companies to enter into shareholders’ agreements that govern the conduct of shareholders and are distinct from the constitution. The key advantage of such an agreement is that it is does not have to be disclosed – whereas the constitution must be filed with the Companies Office in its electronic registry, which is freely searchable by the public.

Although the business and affairs of the company must be managed by – or under the direction or supervision of – the board of the company, some particularly important decisions are reserved for the shareholders of the company. These include:

• a decision to approve a “major transaction” (see 3.2 Decisions Made by Particular Bodies) by special resolution;
• the appointment and removal of directors by ordinary resolution; and
• a decision to amalgamate the company with another company (apart from members of the same wholly owned group) or to commence a voluntary solvent liquidation, each by special resolution.

The chair at a shareholders’ meeting must allow a reasonable opportunity for shareholders to question, discuss or comment on the management of the company. The shareholders are entitled to pass a resolution relating to the management of the company but, unless the constitution provides otherwise, such a resolution is not binding on the board.

In addition, the company’s constitution may confer powers upon shareholders that would otherwise be exercised by the board (Section 126(2)). A shareholder that exercises, or takes part in deciding whether to exercise, that power is deemed to be a director and subject to the directors’ duties contained in Sections 131 to 138 in relation to that action. Similar provisions apply where the constitution of a company requires a director or the board to exercise or refrain from exercising a power in accordance with a decision or direction by shareholders or, as mentioned in 4.5 Rules/Requirements Concerning Independence of Directors, where a director or the board is accustomed to acting or required to act in accordance with another person’s directions or instructions.

The board of a company is required to call an annual meeting of shareholders unless:

• there is nothing required to be done at that meeting;
• the board has resolved not to call or hold the annual meeting; and
• the company’s constitution does not require such a meeting.

The board, or any other person authorised by the constitution, may call a shareholders’ meeting at any time. Such a meeting must be called on the written request of shareholders holding shares carrying together not less than 5% of the voting rights.

Schedule 1 of the Companies Act sets out the default rules for proceedings at shareholders’ meetings. Some of these may be modified by the company’s constitution.

Written notice of a meeting must be given to each shareholder, director and auditor at least ten working days prior to the meeting. The notice must specify the time, the place and the nature of the business to be transacted at the meeting, in sufficient detail to enable a shareholder to form a reasoned judgement in relation to it. Where any special resolution is to be submitted to the meeting, the text of that resolution must be included in the notice.

Shareholders may attend in person or via audio or audiovisual communication (ie, an electronic meeting). Electronic meetings have become increasingly common following the emergence of COVID-19 and are specifically provided for in the Companies Act (Schedule 1) and the Listing Rules (Rule 2.14.3). Shareholders may also appoint a proxy to attend the meeting on their behalf or – if permitted by the constitution – cast a “postal vote”, including by electronic means. The quorum requirement will be met if those attending, together with those voting by proxy or by postal vote, are entitled to exercise a majority of the votes entitled to be cast.

If the directors have elected a chair of the board, that person must chair the meeting if they are present. If the chair is not present within 15 minutes, the shareholders present may choose one of their number to chair the meeting.

For meetings held in person, the default method for voting is by a show of hands or by voice. For meetings via audio or audiovisual communication, the chair may decide how a vote is to be conducted. In each case, the number of shareholders who have voted for or against each resolution by postal vote is also counted. Any five shareholders, the chair, or shareholders who together hold 10% of the votes may require a poll to be conducted – in which case, votes must be counted according to the number of votes attached to the shares held by the relevant shareholders.

Postal votes must be received by the person authorised to receive and count them (or, if there is no such person, any director) at least 48 hours prior to the meeting.

The board must ensure that minutes are kept of all proceedings at shareholders’ meetings. Minutes that are signed as correct by the chair are prima facie evidence of the proceedings.

Shareholders may raise matters for discussion or resolution at the next meeting of shareholders. The Companies Act specifies the timeframes that must be met by a shareholder who proposes to do so and how the cost of giving notice of those matters to all shareholders will be met (ie, whether by the proposing shareholder or the company).

See 4.8 Consequences and Enforcement of Breach of Directors’ Duties.

Dissenting shareholders also have what is commonly known as a “minority buyout right” if certain proposals are approved by shareholders and the dissenting shareholder votes against the proposal. The relevant categories of proposal are:

• an alteration of rights attached to shares in the company;
• adopting, revoking or changing the company’s constitution in a way that imposes or removes a restriction on the activities of the company;
• amalgamating the company with another company; or
• entering into a major transaction.

In such a case, the dissenting shareholder may require the company to purchase their shares at fair value (as determined by binding arbitration, if the value is not agreed).

Under the FMCA, a person is a “substantial product holder” of a listed issuer if the person has a “relevant interest” in 5% or more of the quoted voting products (eg, ordinary shares in a listed company) of the listed issuer. The definition of “relevant interest” for this purpose is broadly aligned with that set out in 4.5 Rules/Requirements Concerning Independence of Directors with regard to directors’ interests in shares, although the two definitions diverge in some respects. The definition of “relevant interest” captures persons who are the ultimate beneficial owner of the share or who may exercise (or control the exercise of) the power to vote  or the power to acquire or dispose of the share.

Persons are required to notify the listed issuer and the stock exchange when they become a substantial product holder, when the extent of their relevant interest changes (either up or down) by 1% or more of the total, or when they cease to be a substantial product holder.

In addition, a director or senior manager of a listed issuer who holds a relevant interest in quoted financial products of that listed issuer must disclose this to the listed issuer and the stock exchange.

Companies (whether listed or unlisted) that have 50 or more shareholders, 50 or more share parcels, and consolidated assets of NZD30 million or consolidated revenue of NZD15 million are also subject to the Takeovers Code (and, as such, are known as “Code companies”). The core requirement of the Takeovers Code is that no person may come to hold or control more than 20% of the voting rights in a Code company, or increase an existing holding or control above that proportion, except in specified ways – for example, by making a partial or full takeover offer to all shareholders or (for a holder of 50% to 90% of the voting rights) by increasing the holding by less than 5% per year.

Companies that carry out business in New Zealand are subject to varying financial reporting requirements that depend on their place of incorporation, ownership, size and listed or unlisted status, as follows.

• The following categories of company are required to file signed audited financial statements with the Companies Office within five months of each balance date:
1. companies incorporated in New Zealand that are not subsidiaries of overseas companies and have assets greater than NZD66 million or revenue greater than NZD33 million in each of the preceding two financial years;
2. overseas companies (and subsidiaries of overseas companies) that have assets greater than NZD22 million or revenue greater than NZD11 million in each of the preceding two financial years;
3. companies with ten or more shareholders, unless they opt out by a 95% shareholder resolution; and
4. any company where shareholders who together hold not less than 5% of the company’s voting shares have given notice requiring the company to opt in to these financial reporting requirements.
• The Listing Rules require listed companies to release annual reports (within three months of each balance date), which include audited financial statements and results announcements in relation to their full-year and half-year results.
• Every issuer of a financial product that is regulated under the FMCA (ie, offerors of financial products for which a “product disclosure statement”, akin to a prospectus, is required) is also required to file signed audited financial statements with the Companies Office within four months of each balance date – regardless of whether or not the issuer is listed (see 6.3 Companies Registry Filings).

If a company’s shareholders resolve to adopt, alter or revoke its constitution, the board is required to notify the Companies Office within ten working days and include a copy of the constitution or amendments, which are then made publicly available. Other governing documents (eg, shareholders’ agreements) do not have to be disclosed.

As regards corporate governance disclosures by listed companies, please refer to1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares. The Corporate Governance Code recommends that a listed issuer’s code of ethics, board and committee charters, and certain policies (eg, concerning continuous disclosure, remuneration, diversity and financial product dealings) are made available on the issuer’s website – together with any other key governance documents.

The following key filings are currently required to be made with the Companies Office and are publicly searchable on the Companies Office website:

• the company’s constitution, registered office address, address for service of legal documents, and postal address;
• the name and addresses of the company’s directors and its ten largest shareholders of each class, as well as details of any change of directors;
• details of any shares issued by the company;
• details of the company’s ultimate holding company (if any); and
• the annual return of the company.

Failure to provide the above-mentioned information within the timeframes specified by the Companies Act can result in fines for directors. In the case of failure to file an annual return, the Registrar can initiate action to remove the company from the  New Zealand Companies Register.

By the end of 2023, the New Zealand government intends to introduce legislation that requires details of each beneficial owner of a company or limited partnership (including their full name and basis on which they are a beneficial owner, and their own upstream beneficial ownership) to be made publicly available on the Companies Office website.

As mentioned in 6.1 Financial Reporting, companies that have made one or more “regulated offers” under the FMCA must ensure the product disclosure statement and all other information relevant to the offer is filed on the Disclose Register, which is a publicly searchable electronic register operated by the Companies Office.

For details of when a company’s financial statements are required to be audited, please refer to 6.1 Financial Reporting. If they are required to be audited, this must be done by a qualified auditor or audit firm, in accordance with applicable auditing and assurance standards. For that purpose, the company must appoint an auditor at its annual meeting to hold office until the close of the next annual meeting. The auditor is automatically reappointed at each subsequent annual meeting unless they resign or cease to be qualified or the company passes a resolution to replace them.

A director or employee of the company (or a partner or employee of any such person) may not be appointed or act as an auditor of the company.

The directors must ensure that the auditor has access to the accounting records of the company at all times. The auditor may require a director or employee of the company to provide such information and explanations as the auditor thinks necessary for the performance of the auditor’s duties. The directors must also ensure that the auditor is allowed to attend any shareholder meeting, receives all notices and other communications to shareholders regarding the meeting, and is permitted to speak at the meeting on any part of the business of the meeting that concerns the auditor.

As noted in 4.8 Consequences and Enforcement of Breach of Directors’ Duties, the business and affairs of the company are required to be managed by – or under the direction or supervision of – the board. Directors must exercise the care, diligence and skill that a reasonable director would exercise (see 4.6 Legal Duties of Directors/Officers). This requires directors to keep themselves apprised of the business risks faced by the company.

The Corporate Governance Code recommends that:

• listed companies have a risk management framework (a summary of which should be included in the issuer’s annual report);
• the board receives and reviews regular reports; and
• the issuer reports on the material risks – specifically, health and safety risks – facing the business and how these are being managed.

The Health and Safety at Work Act 2015 (the “HSW Act”) requires a “person conducting a business or undertaking” (eg, a company) to ensure – as far as is reasonably practicable – the health and safety of all its workers while they are at work and that the health and safety of other persons is not put at risk from that work. The company and its directors can be found liable for breaches of the HSW Act, including where risks are not appropriately managed and systems are not set up to minimise risks.

For NZX-listed companies, the Listing Rules require disclosure of “material information” to the market immediately after a director or senior manager knew – or reasonably ought to have known – the information (unless an exception applies). This requires boards to have appropriate arrangements in place to ensure that any such information does in fact become known to a director or senior manager and can be released to the market as required.