Corporate Governance 2020

Last Updated June 22, 2020

New Zealand

Law and Practice

Authors



Webb Henderson specialises in corporate and M&A projects (including corporate governance, takeovers, joint ventures, partnerships and investment projects), as well as banking and finance, competition law and regulatory advice. Across its Auckland and Sydney offices, the firm comprises 12 partners and 43 lawyers. The Auckland office is headed by partners Graeme Quigley and Garth Sinclair, who are highly regarded corporate lawyers, each with more than 25 years’ experience specialising in corporate governance work, M&A, divestments, and joint ventures. Webb Henderson has recently advised a major New Zealand bank on its corporate governance frameworks and processes, including the composition of and relationships between its board and key committees; one of New Zealand’s largest listed companies on governance issues, including those arising from recent regulatory reviews; and one of New Zealand’s largest public-sector institutional investors on matters related to the governance of some of its most substantial investments.

In New Zealand, the principal forms of incorporated business organisations are the following.

Bodies corporate – ie, separate legal persons from their owners:

  • companies, formed under the Companies Act 1993;
  • limited partnerships, formed under the Limited Partnerships Act 2008; and
  • incorporated societies, formed under the Incorporated Societies Act 1908 (which may not be formed for the purpose of pecuniary gain).

Unincorporated forms:

  • partnerships, formed under the Partnership Law Act 2019; and
  • trusts, formed under common law and equitable principles.

Individuals may also carry on business in their own name (without forming a separate entity or structure), 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 (Companies Act).

In addition, the NZX Main Board/Debt Market Listing Rules (Listing Rules), for issuers of listed securities, and industry-specific legislation (eg, for banks and insurers) add additional corporate governance requirements on top of the requirements of the Companies Act. Absent 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 provisions of the Companies Act by adopting a constitution that sets out the rules by which the company will be governed.

This chapter will, unless otherwise indicated, describe the default position under the Companies Act.

Companies that have financial products listed on the NZX Main Board or Debt Market must comply with the Listing Rules, which impose mandatory requirements relating to corporate governance, including 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 comply with the recommendations made in the Code or explain:

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

The remaining sections of this chapter describe the key corporate governance rules and requirements in New Zealand.

The key recent developments in relation to corporate governance in New Zealand are as follows:

  • Proposed changes to directors’ duties and the establishment of a business debt hibernation regime, each in the context of the COVID-19 pandemic – see 2.4 The Impact of COVID-19 on Governance.
  • The report of the Australian Prudential Regulatory Authority’s prudential inquiry into the Commonwealth Bank of Australia (CBA). This report was described as “the most compelling analysis of corporate governance at a major public company ever to be published” by the Governance Leadership Centre of the Australian Institute of Company Directors, and “required reading” for all directors by then-Australian Treasurer Scott Morrison. The report is also relevant to New Zealand directors, as a number of the principles and recommendations in it are of general application. The report identified shortcomings in CBA’s culture and its governance and accountability frameworks, including the following six "tell-tale markers":
    1. inadequate oversight and challenge by the board and its committees of non-financial risks as they emerged;
    2. unclear accountabilities for, and ownership of, key risks at a senior management level;
    3. weaknesses in identifying and escalating issues, incidents and risks through the organisation, and a lack of urgency in managing and resolving them;
    4. overly bureaucratic and complicated decision-making processes, favouring collaboration over acting swiftly and effectively to address risk failings;
    5. an operational risk management framework that “worked better on paper than in practice”, with an under-resourced and under-developed compliance function; and
    6. a remuneration framework that did not appropriately incentivise the desired risk practices.

The report also provided a set of 35 recommendations to CBA. Many of those recommendations are of general application in relation to organisations’ frameworks for identifying, escalating, managing and responding to emerging risks.

  • The joint reviews conducted by the Reserve Bank of New Zealand and the Financial Markets Authority into bank and life insurer conduct and culture, and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia. While most directly relevant to those industries, these reviews also comment on corporate governance matters of wider application.
  • The Mainzeal litigation in relation to directors’ duty not to agree to, 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 – see 4.6 Legal Duties of Directors/Officers.

The Listing Rules require listed issuers to report a breakdown of the gender balance of their directors and officers and an evaluation of performance with respect to the company’s diversity policy. 

In addition, as noted in 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares, listed issuers are required to either comply with the Corporate Governance Code's recommendations, or explain why they have not. The Corporate Governance Code recommends that issuers provide non-financial disclosure at least annually, including considering environmental, economic and social sustainability factors and practices. The Corporate Governance Code does not mandate the form of this reporting, but does support the use of recognised international reporting initiatives where appropriate to the company’s scale.

In response to COVID-19, the New Zealand parliament has enacted safe harbours to exempt directors from liability under sections 135 and 136 of the Companies Act (see 4.6 Legal Duties of Directors/Officers).

In broad terms, the safe harbours apply to actions of a director who considers in good faith that:

  • the company has or is likely to have significant liquidity problems in the next six months as a result of the impact of the COVID-19 pandemic on the company or its debtors or creditors; and
  • it is more likely than not that the company will be able to pay its due debts on and after 30 September 2021. For the purposes of forming this opinion, the director may have regard to the likelihood of trading conditions improving, the likelihood of the company reaching a compromise or other arrangement with its creditors, and any other matters the director considers to be relevant.

In order to qualify for the above safe harbours, the company must have been able to pay its debts as they fell due as at 31 December 2019. All other directors’ duties (including the duties to act in the best interests of the company and to exercise due care, diligence and skill – see 4.6 Legal Duties of Directors/Officers) continue in parallel.

The timeframes above may be extended once by regulations, but the safe harbour period may not be extended past 30 September 2021.

The same legislation in response to COVID-19 also includes the following measures.

  • The introduction of a business debt hibernation regime, whereby a debtor entity may enter a moratorium on enforcement of its debts if agreed to by 50% of its creditors (by value and number). The moratorium on enforcement does not apply to “general security holders”, being persons that hold a charge over the whole or substantially the whole of the property of the debtor. The debtor entity may carry on trading during the hibernation period.
  • The power for registrars to relax administrative obligations and deadlines in some legislation (including the Companies Act).
  • The expansion of the ability to use electronic signatures where necessary due to COVID-19 restrictions.
  • The granting of temporary relief for entities that are unable to comply with procedural or administrative processes in their constitutions due to COVID-19.

For listed companies, the NZX has issued waivers that allow more equity to be raised under share placements, share purchase plans and rights/entitlements offers, on an accelerated timeframe and without first obtaining shareholder consent. These waivers will expire on 31 October 2020, or such earlier date as the NZX specifies.

The Takeovers Panel has also issued class exemptions to the Takeovers Code in response to COVID-19. See 5.5Disclosure by Shareholders in Publicly Traded Companies.

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 to those senior employees the necessary authority to manage the day-to-day affairs of the business – see further comments in 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 of the company and entry into major transactions. Major transactions 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.

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, but the board is still responsible for monitoring the decisions made by its delegate. There are, however, some powers that may not be delegated by the board (set out in Schedule 2 of the Companies Act), including changing the company’s name, issuing new shares, authorising dividends or other distributions, approving an amalgamation, acquiring the company’s own shares and changing its registered office.

A resolution of shareholders may be passed at a meeting of shareholders (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 Act or constitution. A specified set of matters requires 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 an ordinary or special resolution of shareholders to be passed in the form of a written (circular) resolution, 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 to all shareholders that did not sign it, within five working days after the resolution is passed.

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 audio-visual communication); and
  • voting (at a meeting, only a majority vote of directors present is required, with each director having one vote – the chair does not have a casting vote).

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

Directors may also pass a written (circular) resolution. Unless the constitution specifies otherwise, for such a written resolution to be passed, it must be signed or assented to by all the directors then 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 requires listed companies to either have a remuneration committee and a nomination committee or explain the reasons why not.

Usually the board will elect a chairperson. The default position under the Companies Act is that the chairperson does not have a casting vote. The Listing Rules require a listed company to have at least two independent directors, broadly defined as directors who are free of any interest, position, association or relationship that could reasonably be perceived to influence materially their capacity to bring an independent view, act in the company’s best interests and represent the interests of its financial product holders generally.

The Companies Act only provides for one class of director, meaning that all directors have the same fundamental role. In practice, committee memberships may mean that directors are more or less involved in certain aspects of the business or its governance than others, and the constitution may (if desired) specify different categories of directors.

The Companies Act requires every company incorporated in New Zealand to have at least one director that lives in (i) New Zealand or (ii) an “enforcement country” and who is 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 required.

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.

Industry-specific legislation or corporate governance codes may impose stricter obligations on the board composition of a company in that industry. For example, the Reserve Bank of New Zealand’s Banking Supervision Handbook for the banking sector and Governance Guidelines for the insurance sector 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 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 on 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 that a purpose of the meeting is to remove the director).

These provisions may be modified by the constitution. For example, it is common in the context of an incorporated joint venture for each joint venture party to be entitled 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 constrained 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, when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company – see 4.6 Legal Duties of Directors/Officers.

Section 139 further defines a director as “interested” in a transaction of the company if, and only if, the director:

  • is a party to, or will or may derive a material financial benefit from, the transaction;
  • has a material financial interest in another party to the transaction;
  • is a director, officer or trustee of a party to, or person who will or may derive a material financial benefit from, the transaction, except another member of the same wholly owned group of companies;
  • is the parent, child, spouse, civil union partner, or de facto partner of another party to, or person who will or may derive a material financial benefit from, the transaction; or
  • is otherwise directly or indirectly materially interested in the transaction.

A director who is interested in a transaction with the company (other than a transaction between the director and the company in the ordinary course of its business and on its usual terms) must disclose that interest to the board immediately after becoming aware that he or she is interested in the transaction. Such disclosure must be entered in the interests register, including the nature of the interest and the monetary value or (if the interest is not quantifiable) the extent of the interest. 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 it does allow the company to avoid the transaction within three months of disclosing the transaction to all shareholders if the company did not receive fair value (assessed at the time of the transaction on the basis of the knowledge of the company and the interested director). Where the transaction transfers property to a person and that property is 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 provided 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 is not interested in that transaction. It is, however, common for boards to adopt charters or codes of conduct that record the collective expectations of the board as to how conflicts of interest (which may be more broadly described than the formal definition of “interested” in the Companies Act) will be managed. Those expectations commonly include 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.

A director is also subject to restrictions on the disclosure and use of company information where that information is obtained in his or her capacity as director or employee of the company and that information would not otherwise be available to him or her. 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 accustomed to act (see 5.2 Role of Shareholders in Company Management). These exceptions contemplate the concept of a nominee director ie, where a shareholder is entitled to nominate a director 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 (i) the board approves the disclosure or use; (ii) the disclosure or use will not, or will not be likely to, prejudice the company; and (iii) 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 acquired or disposed of, the nature of the director’s relevant interest, the consideration exchanged and the date of effect. 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 may exercise or control the exercise of the power to vote, or to acquire or dispose of the share.

For unlisted companies, a director must not trade in the company’s shares or other financial products if the director is in possession of information material to an assessment of the value of the shares or financial products that he or she would not otherwise be in possession of but for his or her position as director, unless the consideration paid by the director is not less than, or received by the director is not more than, the fair value of the financial products. If a director breaches this provision, he or she is liable to account to the counterparty for the difference between fair value and the consideration.

In the case of a listed company, the insider trading provisions of the Financial Markets Conduct Act 2013 (FMCA) apply instead. In broad terms, these prohibit persons (including directors) from trading listed financial products while in possession of “inside information”, encouraging or advising other persons to trade those financial products, or disclosing the inside information. “Inside information” means (broadly) information that is not generally available to the market, which a reasonable person would expect to have a material effect on the price of the relevant financial products if it were generally available to the market and that 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 are also under a number of other obligations of a more administrative nature, including the obligations relating to disclosure of their interests and share dealings referred to above, an obligation to supervise the keeping of the company’s share register, and obligations to ensure relevant filings are made with the Companies Office.

See also 2.4 The Impact of COVID-19 on Governance for recent developments.

Section 131 – Good Faith and Best Interests of the Company

A director is required, when exercising his or her powers or duties, to act in good faith and in what the director believes to be the best interests of the company. While that test imports a subjective element (ie, as to the director’s belief, rather than what is objectively in the company’s best interests), a director will fail to discharge his or her duty if that belief “rests on a wholly inappropriate appreciation as to the interests of the company” (Sojourner v Robb [2006] 3 NZLR 808 at [102], recently confirmed by the Court of Appeal in Cooper v Debut Homes Ltd (in liq) [2019] NZCA 39).

If provided for in the constitution and (in some cases) agreed to by the other shareholders, a director may act in the best interests of a parent company or their appointing shareholder (in the case of a joint venture), even though such actions may not be in the best interests of the company.

Section 133 – Proper Purpose

Directors must exercise their powers for a proper purpose. That is, when exercising a power conferred upon a director, the director must exercise that power in line with the purpose for which it was conferred upon him or her. This duty is distinct from the duty of good faith, as it is possible to exercise a power for an improper purpose even though 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 Sections 131 (good faith and best interests of the company) and 133 (proper purpose).

Section 135 – Reckless Trading

A director must not agree to, 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 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]), but the benefit of hindsight should not be applied to directors’ decisions “in circumstances that do not fully and realistically comprehend the difficult commercial choices facing the directors”, and “likely” means “more likely than not” (Cooper v Debut Homes Ltd (in liq) [2019] NZCA 39).

The court in Re South Pacific Shipping Ltd (in liq); Traveller v Löwer (2004) 9 NZCLC 263,570 at [123] to [128] added a gloss to the test by differentiating between legitimate and illegitimate risks. The former are those taken by ordinary businesspeople and are a necessary part of business (and therefore not captured by Section 135). In determining whether a risk is legitimate, the following indicators were suggested.

  • Was the risk fully understood by those whose funds were in peril?
  • Where a company is insolvent (or on the edge of insolvency), were the interests of creditors considered?
  • If a company is insolvent in a balance sheet sense, is there a probability of salvage and is the time allowance for salvage reasonable?
  • Was the conduct of the director in question in accordance with orthodox commercial practice?

In the recent Mainzeal litigation, four of the former directors of Mainzeal (a construction company) were found to have breached Section 135 (Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255). In that 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 on the parent company and the parent company did not provide the support when it was needed. Mainzeal also used funds owing to subcontractors as working capital in order to continue to trade. The directors were found to have exposed creditors to substantial risk of serious loss by relying on the non-binding assurances of financial support, and were held liable (in aggregate) for NZD36 million, representing 30% of the total loss caused to creditors. This decision is currently under appeal.

Section 136 – Obligations

A director must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. Factors that suggest such a 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, that bank finance is still available to the company and 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.

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 him or her.

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

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 others (including employees, professional advisers and experts) whom the director reasonably believes to be competent in the relevant area, and by fellow directors or 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.

Case law indicates that this section does not excuse directors who rely solely on others and pay no mind to the reports or advice that are delivered to them. In the context of financial accounts, directors must have an understanding of basic accounting concepts and an intelligent oversight of the business’ affairs such that they can review the financial accounts placed before them and identify obvious discrepancies.

All of 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 duties to supervise the share register and for directors to disclose their interests and dealings in the company’s shares.

While directors’ duties are not owed directly to creditors, Sections 135 and 136 respectively require directors to consider whether the company’s business is being carried on 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 (on behalf of the company) then bring an action against a director that had breached his or her 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 him or her 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.

In determining whether to grant leave to the shareholder (or director), the court must have regard to the likelihood of success, cost, likely level of relief, any action already taken to obtain relief and the interests of the company in the proposed proceedings. The court may only grant leave if it is satisfied that the company does not intend to bring, diligently continue or defend, or discontinue, the proceedings itself, or that 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 for the company’s constitution.

In any of the above 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 him or her in that capacity or in any other capacity (Section 174). 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 existing for an opinion set out in that certificate. (Directors are required to certify prescribed matters in relation to decisions to (for example) issue shares or pay dividends or other distributions, or for the company to acquire its own shares.) The court may grant a wide range of remedies in respect of 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. In that case it was said that the three terms were not to be read as distinct, but instead 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 is as to 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.

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 are required to 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 a majority of the board were 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 manner described above.

Consequences

Breaches of the directors’ duties outlined above generally attract civil liability (although a number of the administrative provisions of the Companies Act attract criminal liability).

There are two key exceptions as set out below.

  • Section 138A creates an offence for serious breaches of the duty of good faith. Such a breach will occur when a director, in exercising his or her 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.
  • Section 380 creates an offence for dishonestly failing to prevent a company from incurring a debt if 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 (eg, upon conviction of certain offences or crimes involving dishonesty, 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).

There are also limited powers for liquidators, creditors and shareholders, in the course of a liquidation of the company, to apply to the court to order a director (or a promoter, manager, administrator, liquidator or receiver) to repay or restore money or property where that person has misapplied, or 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 (Section 301).

The above commentary describes the key enforcement avenues of general application in respect of corporate governance requirements in New Zealand. There are, however, other potentially relevant enforcement avenues, including that (i) the Financial Markets Authority (a regulator) may apply to the court for management banning orders that prohibit individuals from engaging in certain activities in respect of the governance and management of companies and (ii) 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, and directors of banks if specified criteria are satisfied.

Limitations on Liability of Directors

Section 162 of the Companies Act permits 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 and provision of other benefits to directors (including compensation for loss of office and the making of loans to, and giving of guarantees for the benefit of, directors). However, before doing so, the board must be satisfied that any such action is fair to the company. Any director that votes in favour must sign a certificate to that effect that also sets out the grounds for that opinion. Such grounds must be reasonable – if they are not, the director receiving the payment or other benefit is liable to the company for all such amounts paid or benefits conferred, unless he or she proves that the payment or benefit 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. 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 interests register of the company, which must be made available for inspection by shareholders in the company.

For listed companies, the Corporate Governance Code also recommends that director remuneration should be clearly 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 constitution provides otherwise, shareholders are not liable for the company’s obligations by reason only of being a shareholder, and 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, as distinct from the constitution. The key advantage of such an agreement is that it is not required to be disclosed, whereas the constitution is required to 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 are required to be managed by, or under the direction or supervision of, the board of the company, some particularly important decisions are reserved to the shareholders of the company. These include:

  • a decision to approve a "major transaction" (described in 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 (not being a member of the same wholly owned group) or to commence a voluntary solvent liquidation, each by special resolution.

The chairperson 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 constitution may confer powers upon shareholders that would otherwise fall to be exercised by the board (Section 126(2)). However, a shareholder that exercises, or takes part in deciding whether to exercise, that power is deemed to be a director in relation to that action and is subject to the directors’ duties contained in Sections 131 to 138 in relation thereto. 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 of shareholders, or where a director or the board is accustomed 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 (eg, reappointing an auditor), the constitution does not require such a meeting, and the board has resolved not to call or hold the annual meeting.

The board, or any other person authorised by the constitution, may call a shareholder 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 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 audio-visual communication. Shareholders may also appoint a proxy to attend the meeting on their behalf, or may (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 chairperson of the board, that chairperson must chair the meeting if he or she is present. If the chairperson is not present within 15 minutes, the shareholders present may choose one of their number to chair the meeting.

Where all attendees are present in person, the default method for voting is by a show of hands or by voice. Where attendees are present via audio or audio-visual communication, the chairperson may decide how a vote is to be conducted. In each case, the number of shareholders that have voted for or against each resolution by postal vote is also counted. Any five shareholders, shareholders together holding 10% of the votes or the chairperson may require that a poll is 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 minutes are kept of all proceedings at shareholders’ meetings and minutes that are signed as correct by the chairperson are prima facie evidence of the proceedings.

Shareholders are entitled to 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 that 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.

In addition, dissenting shareholders have what is commonly known as a "minority buyout right" (although it is not restricted to minority shareholdings) 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 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 his or her 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 of 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, in relation to directors’ interests in shares, although the two definitions diverge in some respects.

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 and 50 or more share parcels (Code companies) are also subject to the Takeovers Code. The core requirement of the Takeovers Code is that no person may come to hold or control greater than 20% of the voting rights in a Code company, or increase an existing holding or control above that proportion, except in specified ways eg, by making a partial or full takeover offer to all shareholders, or by increasing the holding by less than 5% per year.

In response to COVID-19, an temporary exemption notice has been granted, allowing persons to hold more than 20% of a Code company’s voting rights without making a takeover offer, provided that they do not increase their holdings by more than 10% per year, and that they do not exceed 50% of the total voting rights.

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

  • "Large" companies are required to file signed audited financial statements with the Companies Office within five months of each balance date. "Large" companies are:
    1. companies incorporated in New Zealand that are not subsidiaries of overseas companies, which have assets greater than NZD60 million or revenue greater than NZD30 million in each of the preceding two financial years; and
    2. overseas companies and subsidiaries of overseas companies, which have assets greater than NZD20 million or revenue greater than NZD10 million in each of the preceding two financial years.
  • Companies with ten or more shareholders are subject to the same reporting requirement as "large" companies, unless they opt out by a 95% shareholder resolution.
  • The Listing Rules also require listed companies to release annual reports (within three months of each balance date) including 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 "product disclosure statement" disclosure is required, akin to a prospectus) – whether or not the issuer is listed on the NZX – is also required to file signed audited financial statements with the Companies Office within four months of each balance date.
  • Companies that do not fall into any of the above categories are not required to file or release their financial statements publicly, unless shareholders together holding not less than 5% of the company’s voting shares have given notice requiring the company to opt into the financial reporting requirements.

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

See also 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares, in relation to corporate governance disclosures by listed companies. The Corporate Governance Code recommends that a listed issuer’s code of ethics, board and committee charters and the policies recommended by that Code (eg, relating to continuous disclosure, remuneration, diversity and financial product dealings), together with any other key governance documents, be made available on its website.

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

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

For companies that have made one or more "regulated offers" under the FMCA (ie, offers for which "product disclosure statement" disclosure is required – akin to a prospectus), the product disclosure statement and all other material information in relation to the offer must be filed on the Disclose Register, a publicly searchable electronic register operated by the Companies Office.

See 6.1 Financial Reporting in relation to when a company’s financial statements are required to be audited. 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 will automatically be reappointed at each subsequent annual meeting unless the auditor resigns or ceases to be qualified, or the company passes a resolution to replace the auditor.

Among other exclusions, 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 at all times to the accounting records of the company. 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 permitted 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 auditor.

As noted above, the business and affairs of the company are required to be managed by, or under the direction or supervision of, the board of the company. 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 the company faces.

The Corporate Governance Code recommends that listed companies have a risk management framework, that the issuer’s board receives and reviews regular reports, and that the material risks facing the business (and how these are being managed), in particular health and safety risks, be reported by the issuer.

The Health and Safety at Work Act 2015 (HSW Act) requires a “person conducting a business or undertaking” (eg, a company) to ensure, so 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 listed companies, the Listing Rules require disclosure of “material information” to the market (unless an exception applies), immediately after a director or senior manager knew, or reasonably ought to have known, the information. Complying with this obligation requires boards to have in place appropriate arrangements for information flows to ensure that any such information does in fact become known to a director or senior manager and can be released to the stock exchange in the required manner.

Webb Henderson

Level 3, 110 Customs Street West
PO Box 105-426
Auckland Central 1143
New Zealand

+64 9 970 4100

enquiries@webbhenderson.com www.webbhenderson.com
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Law and Practice

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Webb Henderson specialises in corporate and M&A projects (including corporate governance, takeovers, joint ventures, partnerships and investment projects), as well as banking and finance, competition law and regulatory advice. Across its Auckland and Sydney offices, the firm comprises 12 partners and 43 lawyers. The Auckland office is headed by partners Graeme Quigley and Garth Sinclair, who are highly regarded corporate lawyers, each with more than 25 years’ experience specialising in corporate governance work, M&A, divestments, and joint ventures. Webb Henderson has recently advised a major New Zealand bank on its corporate governance frameworks and processes, including the composition of and relationships between its board and key committees; one of New Zealand’s largest listed companies on governance issues, including those arising from recent regulatory reviews; and one of New Zealand’s largest public-sector institutional investors on matters related to the governance of some of its most substantial investments.

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