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Business acquisitions: The importance of due diligence to manage risk

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Business risk in New Zealand

With New Zealand economic conditions improving, business confidence on the rise, and general business “picking up” some perceive understanding the risks associated with New Zealand businesses is less important than it once was.  Although there may be some truth that the level of business risk may be lower now than two years ago, the idea that prospective business purchasers can be less prudent when investigating prospective businesses is only creating a false paradigm.  When looking to purchase a business the importance of identifying the risks associated with that business and managing those risks is pivotal.

How to identify the risk

Due diligence is a term used to describe the investigation process undertaken by a purchaser or their representative before a business is purchased.  The objective of carrying out this process is to extract privileged information and knowledge from the vendor about the business.  The information gathered from a due diligence investigation can expose inaccuracies in the information provided by the vendor, as well as details of any current or impeding weaknesses of the business that may inevitably cause substantial risk and loss to the purchaser if the sale goes ahead.

The quality of the due diligence investigation will determine the quality and outcome of the information that is discovered. Therefore, it is important to engage appropriate professionals and experts to conduct the investigation to ensure all avenues are covered, minimising any unexpected surprises following settlement.

Key points to investigate

Although different industries and business structures will have different key areas that will need to be investigated, it is essential that the basic components of a business are investigated irrespective of the size or type of the business.  This includes looking into the arrangements with the employees, the value and quantity of stock/work in progress, the extent of the business’s liabilities and the nature of the existing contracts.

When purchasing shares in a business, investigating the employee matters is less important as the employees are part of the business so generally remain with the business.  Conversely, when purchasing the assets of a business, the purchaser has the option to take over all or some of the employees on the existing employment terms or new employment terms can be negotiated.  Either way, conducting  due diligence will allow a purchaser to determine whether there is any accrued annual leave or other paid leave owed to the employees.  Often the purchaser will negotiate with the vendor for any leave owed to the employees to be paid out prior to the new purchaser taking over the employees’ contracts.

Being aware of the type of stock required to run the business, how often it turns over, and whether the business turnover reflects industry standards, are all questions that will be answered when analysing the stock and work in progress of a business.  It is important that a purchaser feels comfortable with the stock they are purchasing and the value they are paying for that stock.  The extent and nature of the due diligence investigation into the stock/work in progress will depend on the industry the business operates in.  For example, a large furniture manufacturer will have more stock and work in progress to be assessed and valued than a small interior design business.

It is crucial to appreciate the importance of investigating every area of the business as minor inaccuracies such as a small accounting error when valuing each unit of stock can lead to a significant expense on settlement day.

Investigating the vendor’s liabilities is only required when purchasing shares in a business, as the liabilities remain with the business and therefore become the responsibility of the purchaser.  Conversely, when purchasing the assets of a business the liabilities of the business remain with the vendor.  Investigating the liabilities of a business can be an arduous task as the relevant information is usually not as accessible as the vendor can be less willing to provide information about what the business owes as opposed to providing a list of its suppliers.  Despite this difficulty, it is worth purchasers investing in professionals or appropriate experts such as engaging an accountant to review and analyse the financial reports to gain a clear picture of all the business’s liabilities.  A thorough due diligence investigation will minimise the risk of any unknown debt being uncovered well after settlement has taken place.

All third party contracts should be thoroughly reviewed prior to finalising an agreement to purchase a business.  This is so the purchaser is clear about the nature of the relationships, the quality of the goods or services provided, and whether the third parties intend on continuing with the existing arrangement after the business is handed over.  This part of the due diligence process can play a pivotal role in the success of the business after hand over.   For example if a key supplier terminates their contract with the business soon after settlement, there could be serious financial implications if the business is unable to find a new supplier that can supply a similarly priced and quality product.  In the event this occurred, the business may have no option but to go to a more expensive supplier or alternatively a supplier with an inferior product.

What to consider before going unconditional

It is not uncommon once due diligence has been completed, for the purchaser to negotiate some amendments to the sale and purchase agreement.  For example:

  • A reduced purchase price;
  • Renegotiating the values of the tangible assets and intangible assets (e.g. goodwill value to increase and tangible assets value to decrease with the overall purchase price to remain the same); or
  • Adding further vendor warranties (e.g. a turn-over warranty).

During the due diligence period, if any serious issues are uncovered, it may be appropriate for a purchaser to cancel the contract before it goes unconditional, opposed to negotiating more favourable terms to mitigate the risks.  It is important, the purchaser is comfortable with all aspects of a business and understands all of the risks involved before purchasing.   Often a purchaser’s judgement can be clouded in the event a vendor responds to any issues raised by heavily reducing the purchase price.  In this situation the purchaser can overlook the strong possibility that the purchase price was significantly overpriced to begin with instead focusing solely on the “savings”.

A purchaser should invest significant resources into the due diligence process before buying a business.  This will minimise the possibility of anything unexpected occurring/coming to light after the business is handed over.  A quality due diligence investigation carried out by the appropriate experts/professionals will assist with purchasing a viable and successful business.

If you would like further information please contact Laura Monahan on 07 958 7479.

Development contributions: The new regime

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Introduction

Development contributions (“DCs”) continue to get a lot of media attention – and can leave a sour taste, especially as they do not just apply to “developers” as traditionally understood, but to all kinds of projects and people.

Following a central government review in 2013, where the DC regime was described by the then Minister as “complex, difficult to understand, and … applied inconsistently”, the Local Government Act 2002 Amendment Act 2014 (“LGAA 2014”), which largely came into force on 1 July 2014, has significantly altered the landscape for development contributions.

Background to development contributions

The legislation has its own terminology:

  • “development” means a subdivision, building, land use, or work, that generates a demand for reserves, network infrastructure, or community infrastructure, not including pipes or lines of a network utility operator.  Many of these terms have their own definitions as well; and
  • “development contribution” means a contribution provided for in the relevant policy of a Council, calculated in accordance with a statutory methodology, and comprising money, land, or both.

A Council may require a development contribution (“DC”) to be paid when a resource consent, building consent, or authority for a service connection is granted, as long as the DC is consistent with that council’s policy.  Every Council must have a policy before imposing DCs.

DCs may only be required if the effect of the development is to require new or additional assets, or assets of increased capacity – with the consequence that the Council incurs capital expenditure.  A DC is a tax or a charge, not a payment for services.

Complaint processes

The LGAA 2014 places significant emphasis on accountability for Councils in setting DCs.  Essentially it provides for two new processes –  reconsideration and/or objection.

Reconsideration

If a DC is imposed, there is an ability to request that the Council reconsider it, on the grounds that:

  • the DC was incorrectly calculated under the Council’s policy; or
  • the Council incorrectly applied its policy; or
  • the information used to assess the development against the policy – or the way the policy was applied – was incomplete or contained errors.

The Council’s policy must itself set out the process for seeking reconsideration.

The request for reconsideration must be made within 10 working days of receiving notice of the level of DCs required by the Council.  The Council then has 15 working days after it has received all required relevant information to respond.

Objection

Objection is a more formal process, and can be sought on the grounds that the Council has:

  • failed to properly take into account features of the development which would substantially reduce the impact of the development on the demand for community facilities; or
  • required a DC for community facilities not required by or related to the development; or
  • breached other provisions of the Local Government Act; or
  • incorrectly applied its own policy.

A request for reconsideration may not follow an objection, but an objection may follow a request for reconsideration.

If an objection is made, there is then a specified procedure to be followed under Schedule 13A.  This includes:

  • the Council appointing 1 – 3 Commissioners to the matter from a government-appointed list;
  • exchange of evidence, and potentially a hearing; and
  • consideration of the objection by the Commissioners, with regard to the grounds for the objection, the purpose and principles of DCs, the provisions of the Council’s DC policy, and the cumulative effect of the development.

The DC Commissioners’ costs are payable by the objector, as are the reasonable costs incurred by Council in preparing for, organising and holding the hearing.

Judicial review

Neither the reconsideration process, nor the objection process, affects the right to apply for judicial review of a Council’s decision.

Development agreements

Council and a developer may also enter into a development agreement.  The legislation refers to this as a voluntary arrangement, but also sets out what a development agreement must and may contain.

A development agreement cannot force a Council to depart from its regulatory responsibilities, nor can it require a developer to go beyond what the developer would normally be required to do.  A development agreement may include such things as:

  • the timing of the provision of infrastructure;
  • ownership, operation, and maintenance of infrastructure;
  •  mechanisms for dispute resolution; and
  • terms as to enforcement and breach, including provision for a guarantee, bond, or encumbrance.

Within the boundaries of the legislation, there is the potential for developers and Councils to pursue creative solutions.  A dispute resolution arrangement that fits one development may not fit another; in some cases, an encumbrance may be better than a bond or guarantee.

Conclusion

The provisions of the LGAA 2014 need to be understood by everyone who gets hit with a DC.  Developers now have greater rights to complain through seeking reconsideration or making an objection.  Councils have clearer obligations of transparency and accountability.  Development agreements will likely have a greater role in allowing developers and Councils to have a meeting of minds.

If you are levied with a DC you do not like, there is something you can do about it.  Understanding the options is key, and the best approach for determining the way forward is a team effort between the planner, lawyer, and client.

If you would like further information please contact Dale Thomas on 07 958 7428.

The District Plan appeal process put simply

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As many will be aware, the updated version of the Hamilton City Proposed District Plan was released on 9 July 2014 (“July Plan”).  The July Plan was the result of a lengthy negotiation and Council hearing process during which Council received, reviewed, negotiated over and/or heard further evidence in relation to over 1,000 submissions on the Proposed Plan as notified in December 2012 (“December Plan”).  The purpose of this article is to explain the next phase of the process in adopting a Proposed District Plan using the Hamilton City Proposed District Plan proceeding as an example.

The appeals

Since the notification of the July Plan, the original submitters on the December Plan were given the option of lodging appeals with the Environment Court.  Out of almost 1,300 original submitters, fewer than 50 persons/entities chose to lodge an appeal in Court (“appellants”).  A list of the appeals (as well as a copy of the appeals themselves) can be found on Hamilton Council’s website.

In addition to the appeals lodged, some chose to join specific appeal proceedings through “interested party” notices under section 274 of the Resource Management Act 1991.  An interested party notice gives people the right to join an appeal provided they fulfil a defined set of criteria.  The most common reason people join an appeal is because they made a submission on the original Proposed Plan (in this case, the December Plan) and the appeal they wish to join relates to one (or more) of the provisions they made submissions on. However, people can join even if they did not make submissions on the original Proposed Plan, so long as they can show they have an interest that is “greater than the general public”.

The process

The appeal process is different to the previous Council-controlled process in that this step is controlled by the Environment Court.  This means that the Court determines what the next step of the process will be, albeit by seeking input from Council (and its advisors) and all other parties (both appellants and interested parties).

Given the appeals lodged in relation to the July Plan relate to a large number of provisions, some of which are interlinked, it would be entirely impractical for each appeal to be dealt with separately.  Instead, matters will be dealt with together to the extent they relate to the same subject or topic.  The decision on which appeals will be heard together is determined by the Environment Court with input and suggestions from all parties.  In relation to the July Plan, the parties have decided on a structure for how to group the appeals.

The next step in the process is to determine whether the appeals are likely to be resolved by:

  • Negotiation leading to a Consent Order;
  • Mediation; or
  • Court hearing.

A Consent Order is where the parties, through negotiation, agree on a resolution of the appeal by preparing a draft Order for the Court’s approval.  It is a relatively quick and easy method of resolving an appeal.  In order for an appeal to be resolved by Consent Order, all the parties (including the interested parties) have to agree to and sign the Order.

Mediation is the most preferred way of resolving an appeal if negotiations are unsuccessful, as it provides the parties with input into the process and, if successful, avoids a Court hearing altogether.  The mediators are often Court appointed Environment Court Commissioners with previous experience in environmental matters.

If an appeal is unable to be resolved by way of a Consent Order or through mediation, the matter will proceed to be heard in the Environment Court.  This is a Court directed process in which the Judge and the Commissioners will hear submissions from all parties, along with any relevant evidence.  It is a formal procedure where strict rules of process apply which will need to be abided by.  A failure to adhere to time frames etc, may result in a loss of the appeal altogether.  The hearings in relation to the July Plan (if any) are not scheduled to commence until 2015 in order to give the parties enough time to negotiate and/or mediate.

What to think about

Whichever process is chosen, it is important to ensure that the correct mandates (particularly from the Council) have been sorted out early.  Engaging in a Plan appeal process is time consuming and can be costly, so it is vital to be clear on who is responsible for negotiating and who has authority/mandate to make decisions. This will avoid unnecessary delays and/or the risk of a negotiated resolution being rejected by the decision-makers.

All parties (including interested parties) should be conscious of the length of time a Plan appeal process is likely to take.  Not only because it usually involves a large amount of parties (including interested parties), but also because a Proposed District Plan is a very comprehensive document which often evokes a large amount of local, public interest (as noted, the December Plan gave rise to over 1,300 submissions which led to 50 or so appeals being lodged in relation to the July Plan).

In addition, if an appeal has to be resolved by a Court hearing, further delays may incur as a result of Court availability (particularly if a number of districts are going through the Proposed District Plan appeal process at the same time, as is the case at the moment in New Zealand).

While the Environment Court is considered more layman-friendly than the civil Courts (such as the High Court), it is key not to underestimate the importance of obtaining expert advice, both planning wise and in a legal sense.  Technical expert evidence is sometimes required to give strength to an appeal and it is vital that such evidence is prepared in a legally compliant manner (having regard to rules of evidence, the expert Code of Conduct etc).

Funding

Plan appeals can be costly exercises.  In certain circumstances however, a party can seek to have an appeal funded by the Environment Legal Assistance Fund (ELA Fund).  The ELA Fund provides not-for-profit groups (such as environmental, community, iwi and hapū groups) with financial assistance to advocate for an environmental issue of high public interest at the Environment Court. In general it is expected that groups are incorporated or a Trust. The Fund is unfortunately not available to individuals.  More information on the ELA Fund can be found on the Ministry of the Environment’s website.

Summary

The Plan appeal process is a key aspect of the democratic process in which one of the most important local planning documents is prepared.  It gives people an opportunity to further engage with the Council before a Proposed District Plan becomes operative.

While all appeals are lodged with the Environment Court, there are a number of ways in which an appeal can be resolved.  The manner in which a resolution is reached is based on a variety of factors, most importantly by the stance of the parties to the appeal.  Time will tell whether the July Plan appeals are resolved by negotiation, mediation or hearing.

It is imperative to obtain appropriate technical and legal advice through the Plan appeal process, which can be lengthy and costly.  Funding through the Ministry for the Environment is available in certain circumstances.

If you would like further information please contact Dale Thomas on 07 958 7428.

Financial Markets Authority grants first equity crowd funding licences

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Introduction

The Financial Markets Conduct Act 2013 (FMCA) came into effect earlier this year on 1 April 2014 with the implementation of Phase 1.  The remainder of the FMCA is due to come into effect on 1 December 2014 with the introduction of Phase 2.  Phase 1 introduced licensing requirements for equity crowd funders wanting to offer their services.  On 31 July 2014 the Financial Markets Authority (FMA) granted the first of these licences to equity crowd funders PledgeMe and Snowball Effect.

While the relevant provisions of the FMCA came into effect on 1 April 2014, equity crowd funding has only become possible recently due to the licensing requirements imposed under the FMCA that must be satisfied by equity crowd funders before they are able to provide services to potential investors.

What is equity crowd funding?

Equity crowd funding is a financial service offered by a person who acts as an intermediary between a company wanting to issue shares, and investors wanting to purchase shares, by offering an equity crowd funding platform (for example a website) through which the company can make such an offer to the public.  Persons offering such services are known as equity crowd funding platforms, equity crowd funding providers or simply equity crowd funders.

Under the FMCA companies wanting to offer shares are generally required to prepare a product disclosure statement for potential investors – known as an investment statement or prospectus under the former Securities Act 1978.  However, certain exemptions exist under the FMCA (and Securities Act 1978) that mean such disclosure is not required when a licensed equity crowd funder is used to raise funds.  When using licensed equity crowd funders, companies are able to raise up to $2 million in any twelve month period without the usual disclosure obligations set out above (although this $2 million limit includes funds raised under the FMCA’s peer-to-peer lending and small offer exemptions).  Instead of the usual disclosure obligations, companies using licensed equity crowd funders are able to provide more limited information about their business when making offers than is normally required.

Equity crowd funders are able to charge for their services. Companies using their services will be required to sign client agreements detailing what the company must do so that the equity crowd funder can monitor and check up on them to ensure continued compliance with the FMCA.

Licensing

As mentioned, the FMCA sets obligations on equity crowd funders requiring them to obtain a licence from the FMA before being able to provide their services.  To become a licensed equity crowd funder, there are certain minimum standards the licensee must meet and maintain.  These standards include, without limitation, that the applicant:

  • Has fit and proper directors and senior managers;
  • Is capable of complying with its licensing conditions while still being able to effectively perform the offered service;
  • Has not demonstrated any reason for the FMA to believe it may contravene its obligations; and
  • Is registered as a financial services provider.
Obligations and conditions on equity crowd funders

Once a licence is granted, the licensee will also be under ongoing obligations, which include:

  • Compliance with the fair dealing provisions under the FMCA, which, broadly speaking amount to not making false, misleading or unsubstantiated representations;
  • Having written agreements with investors;
  • Having arrangements to provide investors with information to assist such persons in making purchase decisions; and
  • Ongoing monitoring and compliance to identify material changes in circumstances and ensure certain reporting obligations are met.

Licences granted by the FMA will contain conditions to support the licensee’s obligations under that licence, which include conditions imposed by the FMCA, FMA and under associated regulations.  Applicants must demonstrate their capability of meeting these obligations before a licence will be granted.  By way of example only, such conditions might include, but are not limited to:

  • Provision of only market services to which the licence relates, and for which persons are authorised to provide under the licence;
  • Informing the FMA of changes in key people such as directors and managers and those responsible for the activities required for the licensee to be able to deliver its service;
  • Having systems and procedures to ensure maintenance of relevant records that the FMA can inspect without unnecessary delay; and
  • Providing the FMA with any information to allow it to monitor on-going capability and to ensure effective performance of the service in compliance with the FMCA eligibility criteria.
First licences issued

As mentioned above, on 31 July 2014, Wellington-based PledgeMe and Auckland-based Snowball Effect became the first equity crowd funders to be licensed by the FMA, four months after the FMCA came into force.  Although neither planned to initially, these equity crowd funders have the potential to build secondary markets, whereby investors are capable of trading equity in projects.

PledgeMe has already raised $2.5 million in the last two years through reward-based equity crowd funding, and launched its service in mid-August.  Snowball Effect also launched its service in August, offering investors shares in Marlborough based craft brewery Renaissance Brewing, who were seeking to raise $600,000 to $700,000 in funding.  Over 200 companies have already contacted Snowball about raising capital.

The future

On 1 December 2014 Phase 2 of the FMCA comes into force, introducing the remainder of the FMCA.  From this date, crowd funders must be licensed before being able to offer their services, unless an exemption under the transitional provisions applies.  Therefore, for those crowd funders wanting to offer their services, it is prudent to begin the licensing application process now, to ensure that they are legally compliant and ready to go from 1 December 2014.

Equity crowd funding is recognised internationally as an innovative form of investment to the public and an effective method for opening up opportunities for smaller businesses to raise capital growth.  With 12 companies initially putting forward expressions of interest, and Armillary Private Capital (who has partnered with well-known United Kingdom based organisation Crowdcube) looking likely to be granted a licence in the near future, equity crowd funding looks set to be an ever changing landscape in the future.

If you would like further information please contact Laura Monahan on 07 958 7479.

Joint tenants or tenants in common?

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Introduction

When property is bought by more than one individual, the parties can own the property as either tenants in common or as joint tenants.  It will depend on the parties’ circumstances as to which type of ownership will best suit them.  The two different types of joint ownership are described in more detail below.

Tenants in common

A tenancy in common is where two or more people purchase a property together and have defined shares in the property.  For example, if A paid 25% of the purchase price for a property and B paid the remaining 75%, the parties could choose to own the property as tenants in common to reflect their individual shares.  A would own a quarter share in the property and B would own a three-quarter share of the property.  The individual shares would be reflected on the certificate of title to the property.

Furthermore, when either party passes away, their share in the property will not pass to the other party.   The shares are dealt with according to the parties’ Wills.  For example, if B passed away before A, his three-quarter share would not pass to A, as it would if A and B were joint tenants.  Instead, his three-quarter share would pass to whoever he has chosen to leave it to in his Will.

Joint tenants

A joint tenancy is where two or more people purchase a property together and do not have or want defined shares in the property.  This type of ownership is common between a husband and wife.  When one person passes away, their share will automatically pass to the other party through “survivorship”.  For example, if the husband passes away, his share will automatically pass to his wife who will then have full ownership of the property.

A joint tenancy can be severed and in some circumstances it may be beneficial to do so.  In the case of Harvey v Gateshead Investments Ltd the High Court looked at how a joint tenancy can be severed and how caution should be applied in some circumstances.

Background facts

Mr and Mrs Harvey owned a property in Auckland (“Auckland Property”) as joint tenants.  Mrs Harvey ended up with a number of personal debts, and with that in mind, the couple decided to enter into a contracting out agreement under the Property (Relationships) Act 1976 (“PRA”) in December 2009.  Essentially this was so that not all of their assets and liabilities would be shared equally.

Under the agreement Mrs Harvey agreed to transfer her share of the Auckland Property to Mr Harvey, however, the transfer never took place as certain documents that needed to be signed to give effect to the transfer were not signed.

Summary judgment was entered against Mrs Harvey in respect of one of the debts she owed and a charging order was registered over the Auckland Property on 9 February 2010.  On 15 February 2010, Mr Harvey changed his Will to leave his estate to a trust for the benefit of his children and a life interest in the Auckland property to his wife.  However,  Mr Harvey was unable to transfer the Auckland Property to the trust due to the registered charging order.

Mr Harvey died in February 2011 and shortly after his death, the couple’s son, who was the executor named under Mr Harvey’s Will, registered a notice of claim on the title to the Auckland property, which reflected his father’s interest.  Mrs Harvey was subsequently bankrupted in December 2012.  A dispute arose between the couple’s son and Mrs Harvey’s creditors over the Auckland Property.

Summary judgment application

A further summary judgment application was brought by Mrs Harvey’s creditors, in which they argued that:

  • In accordance with section 47(2) of the PRA, the contracting out agreement was void.  Section 47(2) of the PRA states that any relationship property agreement that has the effect of defeating creditors will be void against those creditors during the period of two years after it is made;
  • The notice of claim entered on the title to the Auckland Property by Mr Harvey’s executor should be removed; and
  • Upon Mr Harvey’s death, the Auckland Property should fall to Mrs Harvey through survivorship.

The High Court granted the orders set out in the first two bullet points above however, the Court held that there were arguable defences to the claim that Mr Harvey’s joint interest in the Auckland Property had passed to Mrs Harvey by virtue of survivorship.

Severing a joint tenancy

A separate High Court proceeding took place to determine whether the joint tenancy between Mr and Mrs Harvey had been severed.  The High Court noted that where the right of survivorship (under a joint tenancy) potentially gives rise to an injustice, the Courts will often attempt to avoid this by severing the joint tenancy.

In this case the High Court found that severance had not occurred at law as the required documents, to transfer Mrs Harvey’s share in the Auckland Property to Mr Harvey, had not been signed.  Therefore, the issue was whether there was a justifiable or ‘equitable’ severance of the joint tenancy prior to Mr Harvey’s death, based on the facts of the case.

The High Court looked at two methods of severance of a joint tenancy that relate to this case:

  • Severance by mutual agreement; or
  • Severance by any course of dealing sufficient to show that the interests of all were mutually treated as creating a tenancy in common.

It was found that there was a common intention between the parties to sever the joint tenancy, even though Mrs Harvey was facing insolvency.  The High Court found that the changes made by Mr Harvey to his Will were inconsistent with any belief or intention that the Auckland Property was held jointly.  The Court also accepted Mrs Harvey’s evidence that she held no beneficial interest in the other half share of the Auckland Property and that she had agreed to terminate the joint tenancy as shown in the contracting out agreement.

In referring back to the summary judgment decision and in considering Felton v Johnson [2006] 3 NZLR 475 (SC), which also discussed section 47(2) of the PRA, the High Court stated that there must be a reduction in the amount available to a creditor before any defeating of a creditor’s interest can arise.

In this case, the transfer from Mrs Harvey to Mr Harvey was void against creditors as it reduced the amount of Mrs Harvey’s assets that were available to satisfy her debts as at the date of the agreement.  However, the severance of the joint tenancy did not prejudice creditors as at the date of the agreement or prior to Mr Harvey’s death as the creditors had no recourse to Mr Harvey’s interest prior to his death.  The joint tenancy would have severed upon the bankruptcy of Mrs Harvey or upon any sale order made in respect of the Auckland Property.

The High Court ordered that Mrs Harvey’s creditors were entitled to her share in the Auckland Property. However, the Court decided that the reversal or voiding of the agreement to sever the joint tenancy was not required to give effect to the order.

Conclusion

It is important to consider the different types of joint ownership when  purchasing property with another party and what type of arrangement is best suited to your current situation, taking into account any future plans you may have.  This is highlighted in the Harvey v Gateshead Investments Ltd case.  For example, if Mr and Mrs Harvey had originally bought the Auckland property as tenants in common, this would have allowed them to deal with the property in defined shares.

There are a number of factors to consider before deciding on whether to own property as tenants in common or as joint tenants.  We recommend seeking legal advice when purchasing property to ensure you are fully informed of your options.

If you would like further information please contact Dale Thomas on 07 958 7428.

Building law changes that could affect you

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We have previously reported on the Building Amendment Bill which became law in November 2013.  The bill has made significant amendments to the Building Act 2004 (“the Act”) that could affect you.

There has been some confusion around the timing of the changes, so this article addresses the key changes that are already in effect and those that are yet to come into force.

What changes are already in effect?

The changes that are already in effect include changes to categories of building work that do not require building consent.  The “exempt work” is set out in Schedule One of the Act, which is relatively easy to follow.  Some examples include building work that is in connection with:

  • Single storey detached buildings that fit within certain requirements e.g. less than 10m²;
  • Detached buildings that either people cannot or do not normally enter; and
  • The repair or replacement of detached outbuildings, such as garages and sheds, if certain conditions are met.  For example, the outbuilding must not be intended for public use.

You can also now demolish a building that is detached and is not more than three storeys without a building consent.  You could not do that previously unless the building was damaged.

The changes do not affect exempt work that was started before 27 November 2013.  It is also important to note that, even though some building work is now exempt, it must still comply with the Building Code.  A building’s level of compliance with the Building Code must also not be adversely affected once the exempt building work is completed.

There are now also higher penalties for carrying out building work without a building consent (where one is required).  The maximum penalty for constructing, altering, demolishing or removing buildings without a building consent has increased from $100,000 to $200,000.  This amount also increases by $10,000 per day or part day that the offence continues.  The infringement fee for carrying out building work without a building consent  has also increased from $750 to $1,000.

Too much left for the Courts?

There are clearly some issues that will arise as a result of the new exemptions.  In particular, where the exemption conditions are not clearly measurable and are subject to interpretation.  For example, in terms of detached buildings, “do not normally enter” could be interpreted in a number of ways.  Similarly, in terms of the repair or replacement of detached outbuildings, “not intended for public use”, is open to interpretation.  When is intention assessed?  And who will be regarded as the “public”?  It appears that much will be left up to the Courts.

Despite these issues, the exemptions will of course also have some benefits, such as freeing up council time to deal with more significant issues.   This will in turn reduce procedural delays.

What changes are we waiting on?

The changes that we are waiting on are the most significant and relate to the new consumer protection measures that have been introduced into the Act.  These further changes are to come into force via regulations that are expected to be passed at the end of the year.  The main changes are:

  • The requirement for written building contracts for residential work that is over a certain value.  This will only apply to contracts between building practitioner and client, and not, for example, builder and subcontractor.  It also does not apply to contracts for design work.  If builders do not comply with the written contract requirement, they may face a fine of up to $2,000;
  • The requirement for minimum contractual terms such as setting out the contracting parties, the payment process, timeframes, the process for varying the contract and dispute resolution;
  • The requirement for builders  to provide information to certain clients before a contract is signed, such as:
    • information about their skills, qualifications, licensing status and dispute history; and
    • a checklist that includes matters such as an explanation of the legal obligations of both parties and the risks of a payment in advance arrangement.
  • Essentially if the building work is over a certain value or a client specifically requests the information, it must be provided.  If not, the builder may face a fine of up to $2,000;
  • The ability for a client to require defective building work to be remedied within 12 months – essentially on a “no questions asked” basis.  The remedial work must be carried out within a reasonable time after notice in writing of the defect has been received by the builder.  The client is also able to claim compensation for loss or damage arising from the defective work;
  • A number of warranties will be implied into building contracts, and there will be a number of remedies available for breach of those warranties.  The implied warranties include:
    • That the building work will be carried out in a proper and competent manner, in accordance with the plans and specifications set out in the contract and the relevant building consent; and
    • That all materials to be used will be “fit for purpose” and, unless otherwise stated in the contract, will be new; and
    • That the building work will be completed by the date or within the period specified in the contract (or if no date or period is specified, within a reasonable time).
  • Remedies for breach of the implied warranties include remedial work and/or payment of the costs of remedial work, compensation and cancellation of the contract.  Importantly, the implied warranties cannot only be enforced by the owner who was/is a party to the relevant building contract, but by subsequent owners as well.
A false sense of security?

Largely the changes to the Act that increase consumer protection are positive.  In some cases, such as with the written contract requirement, these changes are beneficial to both parties.  An increase in information exchanged between the parties may also result in a “no surprises” relationship and therefore improve the relationship.

However, there is also some concern that provision of the required information will cause consumers to consider that further advice, such as legal advice, is not needed.  This is not the case.  Seeking legal advice before entering into a contract is always recommended so that issues and potential risks can be identified and dealt with in advance.

Progress with the regulations

There has been no update as yet regarding progress with the regulations.  The Ministry of Business, Innovation and Employment is expected to release an initial draft for public feedback before the regulations are finalised and ultimately passed.  The Ministry must be aiming to do that soon to meet their initial timeframe of the end of 2014.

If you would like further information please contact Daniel Shore on 07 958 7477.

Internet and online traders

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Introduction to online consumer law

Consumer rights are protected by the Fair Trading Act 1986 (the FTA) and the Consumer Guarantees Act 1993 (the CGA).  The purpose of this legislation is to ensure consumers receive the goods and services they pay for, and to ensure that the goods and services received are of reasonable quality.

There are many different ways of selling goods and services online.  This includes through online auctions such as Trade Me, Daily Deal websites like One Day, and via social media, text message or email.  Despite this wide marketplace, the internet is not the proverbial “free for all” where anything goes.  Recent changes to consumer law that came into effect on 17 June 2014 have seen amendments made to the FTA and CGA, with the aim of better protecting online consumers.  These changes and how they relate to existing consumer law provisions are described below.

When will the Fair Trading Act 1986 apply?

Section 28B of the FTA provides that where goods and services are offered for sale to consumers on the internet, and that offer is capable of acceptance via the internet, the seller must clearly identify to potential consumers whether or not it is in trade.  This allows consumers to recognise whether or not they are protected by the provisions of the FTA and CGA.

Where the offer and any resulting sale is managed through an intermediary who is not a party to the sale, that intermediary must still take reasonable steps to ensure the seller complies with the FTA.  For example, Trade Me now offers sellers the option of having an ‘In Trade’ banner appear on their profile, thereby allowing both parties to satisfy their new obligations.

If a seller is in trade and does not make this fact known to the consumer, the seller can be liable to a fine from the Commerce Commission.

While “in trade” is not defined in the FTA, or the CGA for that matter, “trade” under both means any trade, business, industry, profession, occupation, activity of commerce, or undertaking relating to the supply or acquisition of goods or services.  In determining whether someone is in trade, factors to consider include whether the seller:

  • Regularly offers to sell goods or services online;
  • Makes, buys or obtains goods with the intention of selling them;
  • Is GST registered;
  • Has staff or assistants to help manage sales; and
  • Has incorporated a company or set up a form of trading vehicle.

Sellers are unable to avoid their obligations under the FTA or the CGA by using a third party to make offers or to sell goods and services on their behalf.  Where this occurs, the principal seller will still be considered to be in trade, with their agent also facing potential liability.

However, the exception to the rule is where goods are sold that were initially bought or acquired for personal use.  If this is the case, then the seller will not be considered to be in trade.

What other obligations does the Fair Trading Act 1986 impose on online sellers?

Other obligations that a seller must comply with under the FTA when selling goods online include:

  • Avoiding misleading or deceptive representations about the goods or services being sold;
  • Avoiding misleading consumers about any rights and/or obligations they may have;
  • Avoiding unfair sale practices, like bait advertising (where goods and services that cannot be supplied are advertised in order to lure consumers into the store);
  • Having reasonable bases for any claims made about their goods or services, irrespective of whether such a claim is express or implied; and
  • Complying with product safety and consumer information standards where relevant.
What protection is offered under the Consumer Guarantees Act 1993?

The CGA applies to goods and services purchased for personal or domestic use.  This includes sales that are made through online bidding using websites such as Trade Me.  The CGA sets out several warranties a seller makes when selling goods and services, which include that the goods and services:

  • Match their description;
  • Have no undisclosed defects;
  • Are fit for their normal purpose; and
  • Are safe, durable, of reasonable quality, and acceptable.

Under the new changes, sellers must ensure that any goods sold online that are sent or delivered to the consumer arrive in acceptable condition and on time.

Contracting out

Businesses cannot contract out of the FTA as a whole in dealings with individual consumers.  However, section 5D of the FTA provides that certain provisions of the FTA can be contracted out of where:

  • All parties to the agreement are in trade and have agreed to contract out of one or more of Sections 9 (prohibiting misleading and deceptive conduct generally), 12A (prohibiting unsubstantiated representations), 13 (prohibiting false and misleading representations) and 14(1) (prohibiting false or misleading representations in connection with the sale or grant of land);
  • The agreement is in writing;
  • The goods or services are supplied and acquired in trade; and
  • It is fair and reasonable that the parties are bound by the contracting out provision.

Section 43 of the CGA allows parties to contract out of the provisions of the CGA where:

  • The agreement is in writing;
  • The goods and services are supplied and acquired in trade;
  • All parties to the agreement are in trade and agree to contract out of the provisions of the CGA; and
    It is fair and reasonable that the parties are bound by the contracting out provision.

In determining whether it is fair and reasonable to contract out of the relevant FTA or CGA provisions, the court will take into account the circumstances of the agreement, which include:

  • The subject matter of the agreement;
  • The value of the goods and services;
  • Whether either party obtained legal advice before signing the agreement; and
  • The respective bargaining power of the parties, including the extent of their ability to negotiate the terms of the agreement.
Breaching the FTA and CGA

While the Commerce Commission cannot enforce the CGA, if a seller breaches the CGA, then that seller may also be in breach of the FTA, over which the Commerce Commission does have authority.

The Commerce Commission is New Zealand’s primary competition enforcement and regulatory agency.  Set up by the Commerce Act 1986, it enforces the legislation that prohibits misleading and deceptive conduct by traders and the promotion of competition in New Zealand markets.  Part of the Commerce Commission’s role is to investigate complaints and bring Court claims against parties who breach the FTA.

A company breaching the FTA can be fined up to $600,000 and an individual up to $200,000.

Conclusion

The ultimate aim of consumer law legislation is to protect non-business savvy consumers from being ripped off.  In the event of a complaint or claim, the particular facts of the matter in question will always be relevant.  As a consumer, you can protect yourself by:

  • Researching a seller online and reviewing any feedback and comments before making a purchase;
  • Understanding what you are buying by reading the description of the goods or services carefully; and
  • Reviewing the terms and conditions and ‘fine print’ of any offer.

If you would like further information please contact Laura Monahan on 07 958 7479.

Erceg v Erceg: A balancing act between trustee and settlor

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Case law has established that a beneficiary of a trust has a clear right to seek information relating to the trust to enable that beneficiary to ensure trustee accountability.  However, one of the main obligations of a trustee is to satisfy the intentions of the settlor.  When a settlor intends the matters of the trust to remain confidential, the rights of the beneficiary and the obligations of the trustee may no longer be compatible.

The recent case of Erceg v Erceg highlights this conflict and provides guidance in balancing the obligations of a trustee to fulfil a settlor’s intentions, and the rights of beneficiaries to have access to information.

In 2004 Michael Erceg, the founder of Independent Liquor NZ Limited, settled the Acorn Foundation Trust.  Michael was both settlor and trustee, and the Acorn Foundation Trust was one of a number of trusts settled by Michael.

The Acorn Foundation Trust deed contained a confidentiality clause which stated:

“Without prejudice to any right of the trustees under the proper law to refuse disclosure of any document or information, the trustees shall not, unless required by law, be bound to disclose to any person any document or information relating to this Trust, the Trust fund or any Trust property, the beneficiaries or any document setting forth or recording any deliberations of the trustees as to the manner in which they have or should exercise any power or discretion, or the reasons for any particular exercise of any such power or discretion, or any other related documents including this instrument”.

Michael was killed in an accident in November 2005.  Following Michael’s death, his widow and the second defendant, became the trustees of the Trust.

The plaintiff, Millie Erceg, was Michael’s mother.  She was named as a secondary beneficiary of the Trust.

The Trust sold its shares in Independent Liquor NZ Limited for a substantial sum.  The Trust was then distributed.  Millie Erceg did not receive any distribution.

Millie sought an order from the Court that she was a beneficiary of the Acorn Foundation Trust and requested copies of documents relating to the Trust.  These included copies of the Trust Deed, financial accounts for the Trust, the agreements for the sale of the Trust’s shares in Independent Liquor NZ Limited and the minutes of all trustee meetings.

Millie argued that it was her right as a beneficiary to have access to certain information to ensure that the trustees were accountable for their actions.  She requested copies of the Trust’s resolutions and financial statements which would have shown the distributions made to the beneficiaries.  In order for her to be properly advised of her rights and position by her counsel, disclosure of the documents was necessary.

In response to Millie’s argument the trustees claimed that they were bound by Michael’s intention as settlor that the Trust and its affairs remain confidential.  It is an established principle that trustees, when exercising a discretionary power, are not bound to disclose  any information to beneficiaries.

The Court acknowledged that there was a conflict between Millie Erceg’s right as a beneficiary to have access to certain information to ensure the accountability of the trustees, and the principle that the trustees were not bound to disclose the reasons behind their decisions, which had been the intention of the settlor.

Case law

To assist him in reaching his decision, the Judge considered the two leading trust law cases on the issue.

One of those cases was the 2003 UK case Schmidt v Rosewood Trust Ltd.  In that case the Court found that it was not a beneficiary’s proprietary right to have the trust documents disclosed to them, rather it is within the Court’s jurisdiction to supervise, and in some cases, intervene in the administration of trusts.  In a case involving personal or commercial confidentiality, the Court may have to balance competing interests of different beneficiaries, trustees and third parties in deciding whether or not to do so.

The Court also considered the New Zealand case of Foreman v Kingston.  Similarly to the Erceg case, the beneficiaries in this case requested the disclosure of certain trust documents and argued that the trustees were under a duty to disclose these to the beneficiaries. The Court in this case determined that the beneficiaries have the right to receive information which will enable them to ensure the accountability of the trustees, however, that this right is subject to the discretion of the Court.

Erceg v Erceg decision

In relation to Millie Erceg’s first claim, the Court determined that an order declaring her as a beneficiary was unnecessary.  The Acorn Foundation Trust deed named Millie as a secondary beneficiary.

When the Court considered Millie’s second claim, it acknowledged that there was a conflict between her right as a beneficiary to have access to certain information, so as to ensure the accountability of the trustees, and the principle that the trustees were not bound to disclose any reasoning behind their decisions.

The Court agreed that there should be disclosure of the documents requested to allow Millie to be properly advised of her rights and position.  This was, however, to be limited by Michael Erceg’s intention that the Trust remain confidential.  The trustees had an obligation to fulfil Michael’s intention as settlor, subject to their legal obligation to comply with directions of the Court.

Because of this, the Court ordered that the Acorn Foundation Trust Deed and the valuation the trustees received for the Independent Liquor NZ Limited shares were to be made available to Millie Erceg.  Millie and her counsel were also to have access to the financial accounts and resolutions of the Trust, however these were to be subject to redactions to ensure that the names of other beneficiaries and the amounts of individual distributions and loans were to remain confidential.

Case law both internationally and in New Zealand has shown that a beneficiary of a trust has a right to seek information relating to the trust to enable that beneficiary to ensure accountability.  The extent of this right however is subject to the discretion of the Courts, and may be limited by the intentions of the settlor.  Erceg v Erceg provides guidance as to how the Court may balance competing rights and obligations.

If you would like further information please contact Daniel Shore on 07 958 7477.

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.

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