Month: June 2014

Charities update

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Suspension of a member and trustee

The recent decision Pritchard v Evans provides some valuable lessons on how to properly remove trustees and members from an organisation.  Mr Pritchard was a member of the Onehunga Workingmen’s Club, a registered society under the Friendly Societies and Credit Unions Act 1982.  He was elected a trustee of the club in 2011.  Mr Pritchard was suspended as a member of the Club over an incident where it was alleged he was rude to members of staff.

Initial reports of the incident were prepared by staff members and, in response, Mr Pritchard sent an explanation to the Club.  An inquiry committee was established and it invited Mr Pritchard to attend but he declined, claiming that he had not been informed of the allegations against him.  Unbeknownst to Mr Pritchard, the incident reports before the committee included a considerable number of allegations against him relating to previous incidents where he had been allegedly abusive to staff.  The committee ordered his suspension until 22 July 2013.  In May 2013 Mr Pritchard commenced judicial review proceedings to challenge that suspension.

However, because he was still a trustee of the Club, Mr Pritchard was in a position of conflict in relation to the judicial review proceedings.  As a result, at a special general meeting the Club passed resolutions dismissing him as a trustee and also further suspending him until the High Court proceeding had been completed.  Mr Pritchard sought to challenge his suspension and  removal as a trustee.

Decision of the Court

The Court determined that the suspension of Mr Pritchard was unlawful because Mr Pritchard had not been made aware of the particulars of the additional serious allegations that he was facing.  The Club was obliged to abide by the rules of natural justice as they applied to the particular context.

It was also found that, in the lead up to the special general meeting, there was no basis for a complaint that there was a failure to meet the rules of natural justice.  This was based on the nature of those types of meetings being “rough and tumble” (informal) and that, if matters of which Mr Pritchard was not aware were raised at the meeting, it could have been delayed to allow him an opportunity to properly respond.  He was also fairly informed of the meeting, the proposed resolution, and the reason for it.

The Court found that the resolution to remove Mr Pritchard was not ultra vires (outside the scope of the power).  The fact that Mr Pritchard was in a position of conflict in bringing proceedings against the Club while concurrently being a trustee was a sufficient basis for the passing of the resolution.

Ultimately, the decision of the Club suspending Mr Pritchard for six months and placing him on a six month good behaviour bond was found to be invalid.  However, it was considered that the removal of Mr Pritchard as a trustee was valid.

Lessons from Pritchard v Evans

When dealing with the removal of a trustee, particularly in contentious circumstances, it is important to review the rules of the organisation in the first instance and follow the prescribed process strictly.  The decision to expel someone from a public organisation may be the subject of judicial review.  Where a person is at risk of expulsion from an organisation with a consequential risk of damage to their reputation, the courts will expect a high level of compliance with the principles of natural justice including:

  • The need for an accused person to know the nature of the accusations against him or her.
  • The need for decision-makers to disregard irrelevant considerations.
  • The need for decision-makers to act impartially.
Charitable Trusts – is your trust fund sustainable?

In another recent decision, the Mabel Elizabeth James QSM Charitable Trust Board (the Trust) applied to the Court to place the Trust into liquidation pursuant to section 25 of the Charitable Trusts Act 1957 (the Act).  In 2013 the trustees elected to incorporate the Trust under the Act in order to facilitate an application to the Court to enable the Trust to be put into liquidation.  The grounds for the application were that the Trust’s fund had diminished and that the annual income was being exhausted by administration costs and professional fees.

Three things were sought in the application in respect of the Trust:

  • That it be placed into liquidation.
  • That a trustee of the Trust be appointed liquidator of the Trust.
  • That the Trust transfer its surplus assets in equal proportions to three Christchurch based organisations.

In determining whether the circumstances satisfied the “just and equitable” test in s 25(1) of the Act, the Court considered the following:

  • The intention of the settlor to leave a lasting legacy.
  • The expectations of past recipients.
  • The economic viability in continuing to operate the Trust.
  • The Trust deed.

The Court held that, after consideration of the factors listed above, it was just and equitable to liquidate the Trust.

Lessons for the future

While it is noble to leave a legacy for charitable purposes, any person or organisation starting a perpetual trust (the settlor) must consider the on-going administration and other costs with managing a trust fund long-term.  The settlor must consider whether the charitable purpose will last the test of time, as well as whether the trust fund itself is sufficient to support the charitable purposes long-term.  If the sums involved are modest, it may be worthwhile making a one off donation to an existing charity.

If you would like further information please contact Jessica Middleton on 07 958 7436.

Securities Act: Exemption Notices for charities and not-for-profit organisations

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Securities Act (Charity Debt Securities) Exemption Notice 2013

The Securities Act (Charity Debt Securities) Exemption Notice 2013 (Charity Exemption Notice) came into effect on 1 December 2013 and replaces the Securities Act (Charitable and Religious Purposes) Exemption Notice 2003 (2003 Exemption Notice).

The Charity Exemption Notice applies to those registered under the Charities Act 2005 who raise funds through offering debt securities to support their charitable purpose.   The Charity Exemption Notice exempts charities from the trustee, registered prospectus, investment statement, and advertising certificate requirements.

What information does a charity need to provide to a prospective investor?

In accordance with the Charity Exemption Notice, a charity must ensure every prospective investor, before they sign up to the offer provided by the charity, is provided with an information document that complies with clause 6 of the Charity Exemption Notice.

The information document must include a clear warning statement at the front of the document explaining to prospective investors that the charity is not subject to standard offer document requirements under the Securities Act 1978.  Specific wording for the warning statement is provided under clause 6 of the Charity Exemption Notice.

In addition to the warning statement, the following information is required:

  • Reference to the list of authorised financial advisers that appears on the Financial Markets Authority’s website;
  • Information required by clauses 2, 9, 10, 11 and 12 of Schedule 13 of the Securities Regulations 2009;
  • A description of the charitable purpose for which the money paid by investors will be used;
  • Terms and conditions of the offer;
  • Reference to the requirement to be a member of a dispute resolution scheme;
  • Reference to any risks associated with the debt securities;
  • Any other material information; and
  • A statement notifying the investor that they can request a copy of the most recent audited financial statements of the organisation without being charged a fee.

To limit the overall risk and impact of any charity failure on financial markets, the Charities Exemption Notice sets out a maximum amount of funds that can be raised by the charity at any one time.  The maximum amount is $15 million, which is the total debt securities that can be offered and owing at any one time.  This limit came into effect on 1 December 2013.

However, there is an exception in the case of religious organisations, described under the Charity Exemption as “body corporate or unincorporated, that is organised and subsisting, or carrying on business for religious purposes, whether or not it is also exists for other purposes”.  Religious organisations may have until 1 April 2015 to comply if:

  • They provided debt securities under the 2003 Exemption Notice on or before 1 November 2013; and
  • As at 1 February 2014, the amount owing under the outstanding debt securities together with the total amount of the debt securities being offered exceeds $15 million.
Financial Markets Authority – what information do they need?

Charities must, before offering debt securities, provide the Financial Markets Authority with the following information, which must be confirmed on an annual basis:

  • Written notice stating that they intend to rely on the Charities Exemption Notice;
  • A copy of their information document;
  • Information about their directors and senior managers who are responsible for the offer and management of their securities and about the procedures in place for the management and oversight of the investments;
  • A statement of its charitable purpose;
  • Copies of its most recently audited financial statements and the auditors notes;
  • Amounts owing under outstanding debt securities and amounts offered; and
  • The total capital and assets of the charity calculated at the end of its most recently completed accounting period.
Summary

The Financial Markets Authority considers that the exemptions provided under the Charities Exemption Notice do not cause significant detriment to investors as they are provided with a warning at the beginning of the information document, the limit on funds able to be raised is set at $15 million and minimum prescribed required information is to be provided to the Financial Markets Authority.

It is important to understand the information required under the Charities Exemption Notice and Securities Regulations 2009 before drafting an information document to be provided to prospective investors.  Undertaking a review of your current information document or completing an information document from the beginning can be comprehensive and require technical legal knowledge to ensure all information is covered in detail and in form.

Securities Act (Community and Recreational Purposes) Exemption Notice 2013

The Securities Act (Community and Recreational Purposes) Exemption Notice 2013 (Community Exemption Notice) came into effect on 1 December 2013 and replaces the exemption provided under the 2003 Exemption Notice.

The Community Exemption Notice exempts organisations from the requirements of a statutory supervisor, registered prospectus, investment statement, and advertising certificate.   The Community Exemption Notice applies to not-for-profit organisations where they offer interests which give members a right to use the organisation’s assets or other property in return for payment of membership fees or subscription.

A not-for-profit organisation is described as an organisation, whether incorporated or not, that is carried on other than for the purposes of profit or gain to an owner, member or shareholder, such as community-based recreational clubs.  The Community Exemption Notice covers organisations that are not registered under the Charities Act 2005.

What does the Community Exemption Notice provide?

In accordance with clause 5 of the Community Exemption Notice, the exemption will apply as long as the rules of the not-for-profit organisation meet certain requirements, which are:

  • The holders of the securities do not have any interest or right to participate in any capital, assets, earnings, royalties or other property of that organisation or scheme, other than the rights listed in subclause (2); and
  • Payments to the organisation by the holders of those securities is limited to the amount of the fees or subscription.

The rights listed under subclause (2) are:

  • The right to use or enjoy assets or property of the not-for-profit organisation;
  • The right to vote at any meeting of the not-for-profit organisation; and
  • The right to share with the other members of the not-for-profit organisation in the property of the organisation upon its winding up.
Summary

The exemption provided under the Community Exemption Notice is there to relieve not-for-profit organisations of the stringent rules and regulations under the securities law regime.

It is important that the rules of the not-for-profit organisation are clear and cover the requirements under the Community Exemption Notice should the organisation wish to rely on the exemption.

Conclusion

The scope of securities law is broad.  In order to comply with the specific requirements set out under the exemption notices, attention to detail and a comprehensive understanding of securities law is needed.

If you are a charity that offers debt securities to the public, review your information document to ensure it contains the required information and ensure you are providing the Financial Markets Authority with the correct information.

If you are a not-for-profit organisation, conduct a review of your rules to ensure they are worded correctly to comply with the Community Exemption Notice.

If you would like further information please contact Jessica Middleton on 07 958 7436.

“What’s mine is mine and what’s yours is mine”

Posted on by au_common_admin
Introduction

Thompson v Thompson  [2014] CA 117 is a case about relationship property and specifically relates to a post-separation payment made to one spouse under a restraint of trade covenant in a business sale agreement.  The Court of Appeal had to determine whether that payment was to be treated as separate property or as relationship property.  The case considers the nature of the restraint of trade covenant and, in doing so, the question of to what extent the post-separation payment reflected business goodwill or whether it was compensation for personal skills and attributes.

Facts of the case

Following the dissolution of their marriage in 2005, Mr Thompson, (the appellant), and his wife, Mrs Thompson, (the first respondent), agreed on the division of their considerable assets.  These included the family home, a holiday home, various chattels, and the proceeds of the sale of the business, Nutru-Life Health & Fitness (NZ) Ltd (Nutra-Life) and its holding company, Health Foods International Limited (HFI). Both companies had been transferred to the M L Thompson Family Trust (the MLT Trust) some 10 years earlier.  The second respondents were the trustees of the MLT Trust.  The parties were unable to agree on their respective entitlements to a payment of $8 million, made to Mr Thompson under a restraint of trade covenant entered into in December 2006.  This payment was made over four years after the parties first separated in 2002.

Upon their separation in August 2002, Mr and Mrs Thompson had been married for nearly 31 years and had five children together (now all adults).  Mr Thompson had many years experience working in the health foods/dietary supplements industry. In December 2006, the trustees of the MLT Trust sold the business assets of HFI and two other entities to companies associated with Next Capital Health Ltd (Next). The purchase price was $72.3 million. The sale agreement was conditional upon, among other requirements, Mr Thompson entering into a restraint of trade covenant.  Upon entering into the covenant on 21 December 2006, Mr Thompson received a payment of $8 million. It is common ground that the sale of HFI Group was at a very good price, and a significant factor in achieving that price was Mr Thompson’s agreement to enter into the restraint of trade covenant.

The Family Court decision

Mrs Thompson’s claim to half of the $8 million payment was first determined in the Family Court.  The Family Court held that the payment was the separate property of Mr Thompson because the payment was received some four years after the parties had ceased living together as husband and wife.  Therefore the Court found that it was not just to treat any portion of the payment as relationship property.  Mrs Thompson appealed to the High Court.

The High Court decision

According to the High Court, the restraint of trade covenant and the payment raised two separate considerations.  Firstly, the Court considered whether the restraint of trade covenant was given to protect the value of the HFI business.  Therefore it was necessary to focus on the value of restraining Mr Thompson from certain activities for a specified period.  The second consideration was that the covenant restrained Mr Thompson from using his personal skills and attributes.  The Court held that, as the payment for business goodwill was incorporated in the total purchase price, the payment for the restraint of trade covenant had to have been for Mr Thompson’s personal goodwill.

The High Court agreed that the payment was the separate property of Mr Thompson, however the Judge still decided to use her discretion under s9(4) of the Property Relationships Act 1979 to treat part of the restraint of trade payment to Mr Thompson as relationship property. The Court considered that there was a connection between the restraint of trade payment and efforts made during the marriage.  However the evidence before the Court was insufficient to allow the Court to apportion the payment between the amount pertaining to Mr Thompson’s business performance during the relationship and the amount of compensation for the loss of Mr Thompson’s future earnings. The Court held that if the parties failed to reach agreement on apportionment, additional evidence would be required at a further hearing.   Mr Thompson appealed to the Court of Appeal.

The Court of Appeal decision

The two main issues for the Court of Appeal were as follows:

Is the $8 million payment relationship property or separate property?

The Court of Appeal considered that the sum of $8 million as consideration for the restraint of trade covenant reflected the loss of Mr Thompson’s future business opportunities along with the other burdensome commercial obligations he undertook as part of the agreement.   The Court of Appeal held that the payment of $8 million was Mr Thompson’s own separate property and accordingly there was no basis for concluding that part of the business goodwill could be said to be attributable to Mrs Thompson and be available as an item of relationship property.

Should any portion of that payment be treated as relationship property under Section 9(4) of the Act?

The Court of Appeal stated that the starting point for the ascertainment of property resulting from a marriage partnership is the date of separation.  Property acquired after that date is usually considered the separate property of the acquiring spouse.  The key factor in deciding whether such property should be shared is to determine whether there is a link between the relationship and the benefit or burden of changes in assets and liabilities after separation.  There are strong policy reasons behind the differentiation between changes in the relationship property and changes brought about by the actions of one of the parties after separation.  The Court of Appeal held that “we see no principled basis upon which it would be just to treat any part of the $8 million separate property as relationship property”.

Implications of decision

The Court of Appeal decision of Thompson v Thompson endorses the “clean break” policy behind the Property Relationships Act that separate property is not required to be shared with the non-owning spouse. If a spouse could claim against future efforts or attributions of the other spouse then each party would continue to have a stake in the conduct and fortunes of his or her ex-partner, despite the dissolution of the relationship.  It could also unnecessarily promote the malicious post-separation consumption of relationship property, while discouraging the “energetic party” from acquiring or improving assets and repaying debts after separation.  This is because the benefits of these efforts would then have to be unfairly shared with the other party.  The recognition of and the giving of effect to separate property is as much a policy of the Property Relationships Act as the general policy of equal division of relationship property. In other words, the Property Relationships Act recognises that, in some cases, what’s mine is mine and what’s yours is yours.

If you would like further information please contact Daniel Shore on 07 958 7429.

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