Category: Commercial

What is an employee share purchase scheme?

An employee share purchase scheme (“Scheme”) is defined by the Financial Markets Conduct Act 2013 (“FMCA”) as a scheme that is, “established by an entity under which employees or directors of the entity or any of its subsidiaries … may acquire specified financial products … that are issued by the entity”.

Essentially, a Scheme will enable employees, directors, managers and occasionally contractors (“Employee”) of an employer to “buy into” that employer’s business (“Employer”) by purchasing financial products in the Employer, namely equity securities or shares.

Schemes do not have a particular shape or form meaning that Schemes can either be simple and designed to benefit a small number of key Employees (such as directors and managers) for a single issue of shares, or Schemes can be detailed and complex, intended to apply to a wide range and number of Employees over a long period of time and for multiple share issues.  As such, Schemes are diverse and have the potential to encompass any arrangement whereby Employees can acquire shares issued by the particular Employer.

What are the benefits of an employee share purchase scheme?

The benefits of Schemes can be wide-ranging to both the Employer and the participants of the Scheme.

A key advantage is the retention (and attraction) of key Employees.  The general consensus is that where an Employee has a mind-set that he or she is an ‘owner’ of the Employer, that particular Employee’s vested interest in the Employer will be realised in the work he or she does.  International research has reinforced this concept and indicates that Schemes can be conducive to an Employer’s growth and productivity, while at the same time fostering a sense of loyalty amongst its Employees.

Directly related to the retention (and attraction) of key Employees is the incentivisation of those key Employees.  This links in with the concept set out above that where an Employee has a vested interest in the Employer, this interest will be realised in the work he or she does.  Where an Employee stands to experience a gain and/or profit through the success of the Employer, this prospect incentivises that Employee to work harder to realise that gain and/or profit.

Schemes can also be useful for the succession planning of ownership of a particular Employer.  By allowing Employees to slowly buy into the Employer, Employees are able to slowly work their way to a director level, eventually taking over the existing leadership of the Employer and thereby providing for a smooth transition in ownership of the Employer.

Another benefit of a Scheme is that it provides an Employer with a method of rewarding Employee performance that does not negate or reduce the operating cashflow of the Employer.

Employee share purchase schemes under the Securities Act 1978

Reviewing the history of Schemes in New Zealand highlights a general reluctance to implement a Scheme due to the complexity and costs associated with a Scheme’s establishment and maintenance.

Under the Securities Act 1978 (“the Former Act”), Employees of an Employer were generally considered to be members of the public, meaning that Schemes would be caught by the underlying rule of the Former Act which provided that an issuer of securities could only offer securities to the public for subscription where that offer was accompanied by an authorised advertisement, investment statement and/or registered prospectus.

While the Former Act contained particular exemptions that, in particular situations, might exclude a certain Scheme from the required compliance with the underlying rule, it was often found that these exemptions could be difficult to apply with Employers finding that the Scheme may not wholly fit under any one particular exemption.

One such example of an exemption under the Former Act was the Securities Act (Employee Share Purchase Schemes – Unlisted Companies) Exemption Notice 2011 which was introduced to provide relief for unlisted companies.  While the exemption notice did reduce some costs and particular administrative issues, the underlying requirement for a registered prospectus remained and it also introduced a number of restrictive conditions, all of which contributed to an exemption notice that lacked effect.

A further exception to the underlying rule was section 3 of the Former Act, which provided that an offer made only to a ‘close business associate’ could be exempt from the standard disclosure requirements.  However, a review of case law and commentary on the Former Act indicates that a close business associate is viewed as someone who is more than an ordinary worker of the Employer, and is more closely linked to a person who holds a position of leadership, such as a director or manager.  As such, ordinary workers of the Employer were normally unable to come within the exception provided for in section 3.

In light of these (and other) difficulties posed by the Former Act, Employers have largely tended to avoid implementing Schemes.  However, with the replacement of the Former Act by the FMCA in 2014, Schemes have been given a new lease of life, with a specific exemption being included for such Schemes under the FMCA.

Employee share purchase schemes under the Financial Markets Conduct Act 2013?

The introduction of the FMCA has made it easier for Employers to participate in Schemes.  Section 8 of Schedule 1 to the FMCA provides for a specific exemption for Schemes whereby an offer of shares or an option to acquire shares in an Employer or one of its subsidiaries to an Employee under a particular Scheme does not need to comply with the standard FMCA disclosure requirements, provided that certain conditions are complied with.

Those conditions are three-fold and are set out below:

• The offer must be made to the Employee as part of the Employee’s remuneration, or the offer must be made in connection to the Employee’s employment/engagement;
• The raising of funds cannot be the primary purpose behind the offer to the Employee; and
• The number of shares issued in the Employer under all Schemes that the Employer is operating in any 12 month period cannot exceed 10% of the total number of shares in the Employer that are on issue.

In addition, by offering Employees the chance to participate in a Scheme, Employers must still provide Employees with certain information, including:

• A warning statement in respect of the Scheme which outlines the particular exemption under the FMCA being relied upon by the Employer, and which is intended to explain what the offer is, what the risks of investment to the Employee are, and sets out a general requirement on the Employee to be prudent in his or her investigations of the Scheme;
• Basic information regarding the Scheme, including the terms and conditions; and
• Access to the Employer’s most recent annual report and financial statements.

Further considerations

When considering whether or not to establish a Scheme, Employers should also turn their attention to other considerations, which include (without limitation), factors such as:

• The number of shares able to be offered (in light of the restrictions described above), and consequently the number of shares that will be offered;
• What price the shares will be offered at, which will dictate what the Employer entity is valued at; and
• Particular time constraints, such as how long an Employee must first work for the Employer before being able to participate in a Scheme (which can also directly assist with fostering Employer loyalty and incentivise Employees to remain with the Employer).

Another important consideration is the tax consequences for both the Employer and Employee.  Toward the end of 2015, the Inland Revenue Department announced that certain situations might be considered tax avoidance, with Schemes now included as such a situation (whereas they had previously been accepted by the IRD).  The tax consequence of a Scheme arises as a result of Employees being able to purchase shares in the Employer at a discounted price (pursuant to the Scheme).  That discount is the difference between the market value of the shares and the purchase price, which is a taxable benefit to the Employee.

In light of the above, it is clear that setting up a Scheme can be a protracted and complex process with a variety of considerations to pay attention to.  As such, both legal and accounting advice should be sought in order to ensure a Scheme is structured so as to meet an Employer’s particular aims and objectives, while at the same time maintaining attractiveness to Employees.

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

Changing the rules of a charity may seem fairly straightforward and in many cases the process is relatively simple.  However there are a number of pitfalls to look out for when changing your rules, particularly when there are members or beneficiaries who are entitled to vote on rule changes.

Getting started

Assuming the entity is a charitable trust, generally the starting point is the trustees deciding that certain provisions of the rules need to be changed.  The rules may be old-fashioned, may no longer be applicable or simply may not work in practice in 2016.  Some of the common rule changes we see are amendments due to changes in technology such as with meeting procedure to allow for electronic or telephonic meetings, and notice requirements being by email instead of by post or by fax.  Once the decision has been made to change the rules, the trustees must look at the process in the current rules.

Check the current rules

Always check your current rules as a starting point.  You must follow the process set out in the then current rules.  This assumes that the current rules are valid.

Follow the process very strictly.  In a recent High Court decision, the trustees learned the hard way about the powers of the court to invalidate rule changes.  In this case the rules were for elections, removal and appointment of trustees, and amendments to a charitable trust deed – the procedures were not followed correctly.  There was animosity between the trustees over the legitimacy of a 2012 trustee election, and a question as to whether the 2010 amendment to the rules was valid.  In 2010, the number of trustees was amended from ten to seven following a postal vote of those eligible to vote.  The early trust deed required a meeting to be held.  The issue for the Court to decide was whether the 2010 amendment could be made by way of a postal vote without holding a meeting, and whether the Court should exercise its discretion to remove the trustees.  The Court declared that:

• The 2010 amendment was of no legal effect as the correct process was not followed;
• The 2012 trustee election was invalid because the process in the 2005 rules was not followed; and
• As a result, the trustees were removed.  The Court, on the basis of a recommendation from the Attorney General’s office, ordered interim and independent trustees to be appointed to arrange new elections.

This case shows the importance of strictly following the procedure in the rules and demonstrates that the High Court has the ability to invalidate historic actions if procedures have not been correctly followed.  The 2010 error led to future actions also being held to be invalid, leaving the organisation in this case in a position where it was unable to operate.

Notice requirements

It is important to ensure that all of those people who are required to be notified of any proposed amendment are correctly notified in accordance with the rules.  Trustees should be alert to those who must be notified of any proposed amendment.  For incorporated societies or charities set up for the benefit of members or iwi groups, it is likely that there is a requirement to notify members or beneficiary groups.

Some rules provide that any changes to rules must be advertised in certain publications.  The trustees should make sure that advertising is carried out in the correct publications and that any required timeframes are met.  Trustees also need to be aware of what is to be included in those notices.  For example, it may be a requirement that the specific proposed rules are included in the notice.

Keep records

Ensure that accurate and detailed minutes are kept which include a record of those people present at any meeting; quorum requirements, including whether the quorum was met; who voted in favour of the rule change and who voted against the rule change.  Where a number of people are voting, record how many people voted in favour of a change and how many people voted against.  A statement as to whether the rule change was passed should also be included.  It is often difficult to prove that a rule change was validly passed if there is no supporting documentation.  Keeping detailed records will assist if any changes are challenged in the future.

Registering rule changes – the paperwork

Assuming the new rules are validly passed, if your entity is an incorporated charitable trust, an incorporated society and/or a registered charity under the Charities Act 2005, the new rules must then be registered.  An incorporated charitable trust or an incorporated society must notify the Registrar of Charitable Trusts/Incorporated Societies of the rule changes.  A registered charity must notify the Charities Board (previously known as the Charities Commission).  If your organisation falls within both categories, the rule change must be notified with both organisations.

Conclusion

Rules of any organisation should be regularly reviewed to ensure that the rules reflect the current reality of that organisation.  Being aware of the required process and following that process is essential.  If in doubt, seek advice from your lawyer.

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

Tidal Energy Limited v Bank of Scotland [2014] EWCA CIV 1107 considered the role of banking practice when payments are executed through the clearing house automated payment system (“CHAPS”).  The English Court of Appeal by majority held that banks are not required to check that the account name aligns with the account number when processing payments.  Loss from any errors will fall squarely on the customer.  This article assesses the Court of Appeal’s decision, and provides a warning for lawyers and clients alike.

Facts

Tidal Energy Limited (“Tidal”) had an obligation to pay one of its suppliers, Design Craft Limited (“Design Craft”) the sum of £217,781.57.  A third party, holding themselves out as a representative of Design Craft, contacted Tidal and supplied payment details so Tidal could repay the required amount.  Tidal, by CHAPS transfer, effected the payment to what Tidal thought was Design Craft’s account by completing the four boxes on the electronic CHAPS transfer form:  sort code, account number, bank and branch name, and account name.

The money was successfully transferred from Tidal’s account with the Bank of Scotland to the Barclays account details that Tidal had been provided with.  However the account did not belong to Design Craft; the account was in the name of a fraudster, “Child Freedom Limited”.  Barclays signalled to the Bank of Scotland that it had received the money and payment was completed, and therefore debited £217,781.57 from the Bank of Scotland.  The Bank of Scotland then debited £217,781.57 from Tidal’s account.

One week later, Tidal became aware it had been the victim of a fraud when Design Craft informed Tidal it had not received payment.  By this time, all of the money had been withdrawn by the fraudster.

The issue for the Court of Appeal to consider was whether the Bank of Scotland had the authority to debit Tidal’s account, given that the account name provided by Tidal did not match the account number provided.

Ruling

The majority by 2-1 held that the Bank of Scotland had the authority to debit Tidal’s account despite the payment details on the transfer form being incorrect.

The purpose of the CHAPS system is to achieve rapid, same day payment (usually in less than 90 minutes according to expert evidence in the case).  CHAPS is most commonly used in settlement transactions.  The majority held that as the purpose of CHAPS is to achieve rapid payment, and if account names had to be manually checked each time a CHAPS payment was made, this would not be possible.  Because Tidal contracted with the bank to execute the payment using CHAPS, and it was banking practice that the account name was not checked in CHAPS transfers, the responsibility was on Tidal – the customer – to ensure all of their details were correct.

This case reinforces the rule established in the nineteenth century case of Hare v Henty that “A man who employs a banker is bound by the usages of bankers”, even if that practice is unknown to the customer.  The customer therefore, by execution of the CHAPS form, authorised the bank to make the transfer in accordance with usual banking practice.  As Lord Dyson MR pointed out, the court should avoid a construction of the form which is inconsistent with business common sense; such a construction cannot have been said to be the intention of the parties.

Discussion

Great difficulties would arise if banks were only authorised to make payments when there was correspondence with all four unique identifiers.  For example, if “A B Smith” was entered in account name instead of “Adam Brian Smith” which was the name on the bank’s record, the bank would not be authorised to make the payment, even if the person referred to was clearly correct.  This could have significant consequences for commercial transactions, and may cause parties to fail to meet settlement deadlines.

However, the practice should be made known to customers when transactions are entered into.  Currently the banking practice that banks will not check account names is not made known to the customer when submitting details into the form, nor is there anything in the form or the admissible background to alert the reasonable customer to this practice.  It may be prudent for banks to update their electronic payment forms to ensure that customers take extra care when making payments, as it is clear from this case that it is the customer that will bear the loss of any mistakes or inaccuracies.

Warning for lawyers and clients

This case should act as a warning for both lawyers and clients in New Zealand alike when using electronic payment mechanisms, in particular CHAPS or an alternative.  As Tidal found out, for banks it is only sort codes and account numbers that matter;  therefore these must be the focus for both lawyers and clients.  Mistakes must be avoided.  Before any payment is made, it is the responsibility of the customer, and not the bank, to ensure the unique identifiers align.  If there are errors, it is the party making the payment that will bear the loss; the bank is not going to be double-checking account names.

A second warning from the case is that clients need to ensure payment details come from a trusted source.  Have you ever dealt with the party holding themselves out as the company before?  If not, care must be taken.

For lawyers, this case provides an incentive to review internal payment systems, and to ensure that adequate mechanisms are in place to avoid loss.  This could involve checking with the bank that the account specified relates to the name that you have been given, in particular if making a payment to a new client.

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

Background

The new financial reporting standards are now in place (as at 1 April 2015) for registered charities.  Part one of this series summarised the different tiers of the reporting standards, and how to move between tiers.  Part two of the series outlined the non-financial information which is required to be included in the reports.  This is the final article in this series and summarises the rules for related entities and provides guidance as to when consolidated accounts are required.

Branches or divisions of a charity

For the purposes of the new standards, a registered charity is a “reporting entity”.  Some charities set up sub-entities to carry out their different activities (for example, a second hand shop, or a trust to manage properties).  For the purposes of financial reporting, these would be considered part of the “reporting entity” and the charity would need to include information about these branches in their performance report.

Related entities and consolidated accounts

Consolidated accounts are required when a charity holds a control relationship with another organisation.  Charities that maintain a control relationship or powers to govern the policies of other organisations are known as related entities.  Power to govern could be indicated by a charity’s ability to veto, overrule or modify decisions of an organisation’s governing group.  This may include decisions on revenue policy; how money is raised and spent as well as the ability to appoint/remove members of the governing body and close or wind up the organisation.  A control relationship exists if a charity receives a benefit from the power it holds over another separate organisation.  Charities may receive benefits from these other organisations by receiving portions of profit or surplus or the use of goods or services that contribute to the charity’s objectives.  Charities in these types of relationships will need to include information about these related entities and include these in their performance reports as “consolidated financial statements”.

Consolidated financial statements present information about a charity and the organisation it controls as one single entity or the “reporting entity”.  When reporting on a consolidated financial statement, charities should combine their assets, liabilities, income, expenses and cash flows with those of the organisations it controls.  The combined expenditure of consolidated financial statements is required to better determine the charities correct reporting tier and could indicate that the charity is required to report in a higher tier.  Refer to part one of this series for further information about the applicable tiers.

This article is part three of a three part series. 

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

Introduction

The introduction of the Financial Markets Conduct Act 2013 (FMCA) was hailed as a ‘once in a generation rewrite’ with the aim of restoring confidence in New Zealand’s financial markets.  Phase 1 of the FMCA came into effect on 1 April 2014.  This was later followed by the introduction of Phase 2 on 1 December 2014.

We are currently in the ‘transition’ period between the full implementation of the FMCA (and associated legislation) and the full repeal of the Securities Act 1978 (and associated legislation) on 1 December 2016.

A key aspect of the FMCA was to consolidate and clarify the law relating to the governance of offers of securities under the Securities Act 1978 and its associated legislation, which tended to be a ‘mish-mash’ of governance rules that were scattered amongst several pieces of legislation.

Governance in general

Part 4 of the FMCA introduced stringent new governance requirements for regulated offers of financial products.  In general, these requirements impose overarching duties on issuers to maintain electronic registers and keep copies of documents for all such regulated offers, be they debt securities or managed investment products (MIP) under a managed investment scheme (MIS).

Specific requirements imposed on issuers of regulated financial products include:

• A trust deed and supervisor for regulated offers of debt securities, in addition to general issuer and supervisor obligations.
• A governing document, manager and supervisor for regulated offers of MIP under a registered MIS, in addition to general issuer, manager and supervisor obligations.

These requirements ensure a better understanding on the part of issuers, managers and supervisors with regard to the management of their accountability and responsibility to both investors and the Financial Markets Authority (FMA) by ensuring that compliance with the FMCA is achieved and the requisite information is provided to the FMA.

By giving supervisors less ability and opportunity to protect themselves from liability, the FMCA has promoted greater involvement on the part of supervisors in ensuring investor protection.

The role of the supervisor

The FMA regards the role of the manager of an MIS in a similar light to that of supervisors, namely being to ensure governing documents and governance arrangements are fit for purpose in placing investors’ interests above all else.

The FMA’s expectation is that those persons in a supervisory role must be able to demonstrate that they are empowered to carry out that role by:

• Working with the manager/issuer in the development of appropriate governing documents.
• Ensuring the governing documents allow them to act in the best interests of investors.
• Ensuring that there are a range of tools available for use where the interests of investors are not met.

In addition, supervisors will generally be responsible for ensuring that managers of an MIS are adequately discharging their duties.

A practical approach

In a recent speech, the FMA’s Director of Compliance, Elaine Campbell, has recommended a practical approach be taken to the supervision responsibilities under the FMCA.  Supervisors occupy a key role under the FMCA and Campbell indicated the FMA would begin to place increasing emphasis on supervision responsibilities.  The FMA has advised issuers to start their planning from the top in the anticipation that boards and senior management will best understand the processes their firms are running.

The FMA’s focus is that an approach of preventative regulation will be most effective in identifying and anticipating potential causes of harm to market integrity and the interests of investors.  In a Media Release dated 9 March 2015 the FMA identified seven practices to overcome potential harm which are:

“ensuring quality sales and advice practices, addressing conflicted conduct in financial services, ensuring high standards of governance and culture among firms, ensuring integrity and growth in capital markets, ensuring effective frontline regulators, and improving information and resources for investors making decisions about products”.

The FMA has also intimated an approach that thinks beyond compliance.  It has advised that the effectiveness of the FMCA hinges on issuers going above and beyond the mere basic requirements prescribed by the FMCA, and it has indicated that it expects issuers to do just this.  The FMA anticipates that businesses will run systems to ensure that the highest standard of conduct is maintained.

The FMA has set out that supervisors will need to ensure they are sufficiently empowered to discharge their duties under Part 4 of the FMCA.  Supervisors must be assured of this before accepting any supervisory appointment.

Prior to accepting an appointment, supervisors should also review the relevant governing documents to ensure the minimum standards under the FMCA are met.  The FMA has emphasised the importance of ensuring that governing documents are well-structured from the outset in order to better allow supervisors to perform their obligations.

When to transition

The key decision for many businesses will be deciding when to adopt the new governance rules (and commit to FMCA compliance).

The expectation of the FMA is for supervisors to not take a ‘silent’ role but rather actively engage themselves with their subjects.  This includes consultation on the transition process from the Securities Act 1978 to the FMCA.

While some issuers may have already transitioned to the FMCA regime, others may be waiting for further clarification.  The decision on when to transition will ultimately depend on the individual circumstances with each situation being unique.  However, what the FMA has made clear is its willingness to act as a facilitator in encouraging and assisting businesses and other professionals in achieving compliance with the FMCA.  This facilitative approach indicates the FMA’s desire to ensure problems are identified and rectified and assist in a smooth transition for affected parties from the Securities Act 1978 to the FMCA.

The new framework encourages supervisors to take a more central and active approach to their role.  Issuers and supervisors should therefore be more accommodating and open with one another in regard to information and what each party needs from the other.

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

Almost one year after the introduction of the Fair Trading Amendment Act 2013, section 26A, which relates to unfair contract terms in standard form consumer contracts, came into force on 17 March 2015.

The purpose of the ten month delay between the introduction of the Act and the enactment of section 26A was to allow businesses enough time to ensure that all standard form consumer contracts comply with the new laws.  The Commerce Commission has stated that there will be no ‘grace period’ for businesses now that this section has come into effect.

If a consumer believes a contract term is unfair, the consumer is able to make a complaint to the Commerce Commission.  Section 26A allows the Court, on application by the Commerce Commission, to declare a term in a standard form consumer contract to be unfair.  A term that is found to be unfair cannot be enforced across all contracts of that business.

Section 26A applies to all contracts entered into from 17 March 2015.  It will also apply to any pre-17 March 2015 contract that is varied or renewed after the enactment date, even if the variation or amendment is a minor one.

A business or trader that breaches section 26A could be liable to a fine of up to $200,000 for an individual or up to $600,000 for a body corporate.  The business or trader may also be required to make a Court enforceable undertaking, prohibiting the use of the term in future contracts.

Section 26A can only apply to standard form consumer contracts.

A standard form consumer contract is a contract that has not been subject to “effective negotiation” by the parties.  Gym contracts, telephone/mobile phone contracts and hire purchase agreements are all examples of standard form contracts likely to fall into this category.

If the Commerce Commission alleges a standard form contract exists, the onus is on the defendant business to prove otherwise.

Terms that define the main subject matter of the contract or which transparently set the upfront price of the goods or services are exempt under the section and may not be declared unfair contract terms.  This encourages clarity and certainty in trade and business.

What is an ‘unfair’ term?

For a term to be found to be ‘unfair’, the Court must be satisfied:

• That the term causes significant imbalance to a party’s rights or obligations.  In determining this, the Court will consider the contract as whole, and whether the unfair term in question is balanced by other, more favourable, terms in the contract.  For example, the high early cancellation cost in a gym membership contract may be balanced by the cheaper membership price initially paid by the consumer.
• That the term is not reasonably necessary to protect the legitimate interests of the party that is advantaged by the term.  The onus is on the business to prove that the unfair term is ‘reasonably necessary’ to protect the interest of that business.  For a clause to be reasonably necessary, it must be shown that the interest of the business cannot be reasonably protected by any fairer means.

  An example of where such a term may be necessary is in a Sale and Purchase Agreement for a mortgagee sale, where a bank has excluded the usual vendor warranties. This may cause an imbalance prejudicial to the purchaser as the purchaser does not have the protection of the vendor’s warranties, however it is necessary to exclude these terms to protect the bank.  The bank will not have day-to-day knowledge of the property and cannot give these warranties.

• That the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.  The threshold for showing detriment to a party is not high.  In the Australian case of ACCC v ByteCard it was found that temporary loss of internet and access to emails was detrimental to consumers.  It is likely that the New Zealand Commission will take a similar approach.

Tips for businesses and traders

It is important for a business to be able to identify potentially problematic terms.  Be aware of ‘grey list’ terms, review the guidelines published by the Commerce Commission and keep up to date with Commerce Commission decisions.

When drafting or reviewing contracts:

• Aim for mutuality of clauses (for example, when considering termination rights).  Is a potentially unfair term balanced by a more favourable term?
• Ensure you can justify the use of the term and show that is it is reasonably necessary to protect a legitimate commercial interest.  Be prepared to identify the reason for any potentially unfair term, and keep any evidence that helps show that the term may be reasonable.
• Avoid using clauses that overreach.  Any penalty or liquidated damages clauses should reflect actual costs that would arise from a breach of contract.
• Consider whether contracting out of the Fair Trading Act 1986 is an appropriate option in business-to-business transactions.
• Make sure any surprising, unusual or particularly onerous contractual provisions are clear and visible.  Consider including these in a prominent position, such as in the definitions or interpretation sections of the contract.

It is important that all businesses review their standard form consumer contracts to ensure that they comply with the new consumer protection laws.

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

Enacted in 1986, the purpose of the Fair Trading Act is to encourage competition in trade, while protecting consumers from misleading and deceptive trade practices.  2014 saw a number of significant changes in New Zealand consumer law, specifically, the introduction of the Fair Trading Amendment Act 2013 (“the Act”).

We set out the changes below.

Unsubstantiated representations

The new Act has introduced a provision that prohibits traders from making unsubstantiated representations.  The purpose of this change is to discourage traders from making claims that are untrue.  A Business must be able to ‘back up’ its claims before its product goes to a consumer.  A representation is unsubstantiated if the person making the representation does not, when the representation is made, have reasonable grounds for the representation, irrespective of whether the representation is false or misleading.

Contracting out of the Act

Previously, a business was unable to enforce any agreement that was contrary to its obligations under the Fair Trading Act.  The new Act gives businesses the ability to contract out of certain Fair Trading Act obligations in their dealings with other businesses.  Businesses may only contract out of the provisions relating to misleading and deceptive conduct, and representations.  Both parties must agree to contract out of the provisions, and the agreement must be in writing.

Unfair contract terms

In March 2015, the Court, on application by the Commerce Commission, will be able to declare terms in some consumer contracts to be unfair contract terms.  For further information on this change, please see our article on the new section 26A.

Product safety

The Act now includes a provision for voluntary recalls of products that are found to be unsafe and increases the powers of the Commission relating to this.  The Minister of Consumer Affairs may require a supplier to recall goods, disclose information or provide a repair, replacement or refund, if it was reasonably foreseeable that use or misuse of a good could cause injury.

Unsolicited goods or services

Under the Act, it is an offence for a person to assert or appear to assert that they have any right for payment for unsolicited goods or services.  An unsolicited good or service is a good or service provided to a person when that person has not asked for that good or service.  A sender of unsolicited goods must inform the recipient of their rights and obligations.  The recipient is not obliged to pay for unsolicited goods, his or her only obligation is to make the goods available for collection by the sender within 10 working days after the goods are delivered.  If the goods are not collected within that period, the recipient takes the goods as an unconditional gift.

Layby sales

The Act now regulates layby sales, however these new provisions only apply to agreements entered into after 17 June 2014.  The Act provides that a layby sale must be in writing, and a copy of this is to be given to the consumer.  Information relating to cancellation of the sale, including any fee to be charged and how this is calculated must be also be provided.

Uninvited direct sales

An uninvited direct sale is when a business, or their agent, approaches a consumer uninvited at their home, workplace, or over the telephone.  The Act replaces the Door to Door Sales Act 1986 which previously regulated door-to-door and telemarketing sales.  Under the  Act, a consumer has  a five working day period from receipt of the sale agreement (or at any time if no agreement is given) in which the consumer may cancel the contract.  The consumer must be given oral notice of the cancellation provision and a written copy of the sale agreement before agreeing to the transaction.

Extended warranties

Regulation relating to extended warranties has been introduced to allow for greater consumer protection.  When offering extended warranties, suppliers must set out the existing rights of the consumer and what extra rights the extended warranty will provide.  There is also a regulated cooling off period and liability for the actual warranty provider as well as the supplier who arranged the extended warranty.

Auctions

The auction process is now specifically regulated under the Act.  Auctions, for the purpose of this section, are conducted by auctioneers and a fee or commission is charged.  Online auction-style sites, such as TradeMe are excluded.  This section makes it clear how auctions are to be run and introduces new rules relating to vendor bidding.  The Consumer Guarantees Act 1993 will now also apply to goods and services sold at auctions and by tender.

Conclusion

The Fair Trading Amendment Act is a key development in New Zealand consumer law and seeks to modernise the legislation relating to the sale and purchase of consumer products.  It will also align our consumer standards with similar Australian legislation as many of our goods and services cross the Tasman.

The Act is a positive change to consumer law, it has not only strengthened consumer rights and created bold new obligations on businesses in trade, it has also provided the Commerce Commission with the tools needed to successfully enforce the Act.

The Fair Trading Amendment Act will significantly impact most businesses.  We suggest that all businesses review their current procedures to ensure that they comply with the changes.  Please contact one of our Team for assistance should you have any queries.

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

Introduction

The new financial reporting standards are now in place (as at 1 April 2015) for registered charities.  Part one of this series summarised the different tiers of the reporting standards, and how to move between tiers.  This part outlines the non-financial information which is required to be included in the reports.

Entity information

The new reports must contain a general descriptive summary to provide information concerning a charity’s activities including what it does and how it is organised.  This is necessary to assist the public’s understanding and to help with the interpretation of the performance report.  This should include the following details:

• The charity’s name, type and legal basis (for example, charitable trust or incorporated society);
• A purpose or mission and the key difference or awareness the charity is trying to achieve;
• General information on the structure of the charity’s operations.  This should include governance arrangements and details of those holding governing and managerial positions in an organisation;
• A brief overview of the charity’s main sources of income and resources (as a brief introduction as this is covered further in later sections of the financial report);
• The main methods used to raised funds (if applicable);
• Details of  volunteer numbers and information about reliance on any goods or services provided to the organisation;
• Any additional information that may assist the public to gain an overall understanding of the particular charity.

The above points are required only for the purpose of a summarised introduction to the financial reports.  The details of each point are required to be expanded on in the financial performance report headings, set out in more detail below.  The amount of detail required will depend on the size of the charity and the complexity of its operations.

Statement of service performance

A charity should provide mainly non-financial information under this heading.  This information is required to help understand the activities of the entity during a financial year. This can be broken down into two main sections:

• Outcomes: what a charity is seeking to achieve in terms of their impact on society.  This is closely related to its mission or purpose as outlined in the entity information above but this section should aim to provide further specific details on its short to mid-term goals.
• Outputs: this section should provide quantification of the goods and/or services that a charity has delivered in the current year.  A charity is not expected to provide detail on every output in a year, rather only the outputs that are significant to performance.

Statement of financial performance

The performance report will need to include financial statements that show details of a charity’s revenue and expenses (balance sheet) and the resulting surplus or deficit from each financial year.  Revenue, for the purposes of financial statements, is income other than that received from borrowings or asset sales.  Examples of revenue may include public donations, philanthropic grants, donations, membership fees received, and proceeds from goods and services to a charity on its own account.  Expenses are regarded as day to day expenses of an organisation such as petrol, rent, office supplies, advertising, salaries/wages and power.  Capital expenses are not required to be reported.  These are fixed asset purchases of significant value to an organisation and that last longer than 12 months.  For example, motor cars, computers, furniture, as well as additions to existing assets such as buildings or land, all of which will not need to be reported.

Statement of financial position

Charities will be required to provide details regarding their total current assets and liabilities.  This is essentially a snapshot of what the charity owns and owes and the value of its member’s financial interest in the charity.  “Current” for the purposes of the report means assets or liabilities that are expected to be cashed within the following reporting period.  For example bank accounts, cash, debtors and prepayments, inventory, property, equipment and investments.  Liabilities that are required to be reported may include bank overdrafts, creditors/accrued expenses, employee costs payable, unused donations or grants and any loans owed by a charity.

Statement of cash flows

Cash flow statements are required to inform those interested about a charity’s cash movements during a financial period.   A statement of financial performance indicates the revenue and expenses while a statement of cash flow provides those interested with information around the timing of transactions.  A charity’s cash flow statement is comprised of payments and receipts from operating and investment/financing activities.  For instance a charity will need to report on receipts from operating activities such as donations, fundraising, fees, subscriptions, goods and services and dividends and any operating payments made to suppliers and employees.  Investment receipts may include things like property, equipment or capital from members while investment payments comprise payments to acquire property, equipment or capital repaid.

Next steps for registered charities

While the financial side of the reports will not be different to what was done previously by many charities, the non-financial aspects of the new reports will be.  No doubt some charities may find the extra steps time consuming where resources are already stretched.  Other charities may see the changes as an opportunity to reflect on the overall purpose of the organisation and how it is achieving or attempting to achieve that purpose.  This reflection may lead to a refocusing of the activities long-term.  In any event, the information will be available to the public, funders and other stakeholder, and may influence how charities are supported by these stakeholders.

This article is part two of a three part series.  The final article in this series will summarise the rules for related entities and provide guidance as to when consolidated accounts are required.

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

The new standards

Registered charities in New Zealand enjoy a privileged position in that charities are not required to pay tax on income.  Despite this privileged position, to date, there have been no minimum standards on the content or the quality of financial standards for charities.  From 1 April 2015, new reporting standards come into effect for all registered charities in New Zealand.  One of the aims of the new standards is to raise the standards, ensure a level of conformity in reporting, and ensure charities remain accountable to the public.  All charities will now need to complete annual reporting which include, completing an annual return, and attaching to that annual return financial statements/performance reports which comply with the new standards.

Summary of tiers

The new standards have been set by the External Reporting Board (XRB) and introduce four different reporting tiers.  The tier that a charity may report under is determined by the annual expenses or operating payments of its previous two financial years.   The reporting tiers one-four aim to accommodate large to small scale charities.  The tiers mean that smaller charities prepare simplified financial statements and larger charities will be required to use a set of more detailed accounting standards.  It is estimated that 95% of charities will be eligible to use the simplified standards while larger scale charities will have the assistance of specially designed templates and guidance notes.

Tier one

All charities default into tier one but have the option to report to another tier if they meet the criteria. Charities with annual expenses over $30 million or with public accountability must report under tier one.  This tier is generally for large profit entities who must report in an independent and personally designed format.

Tier two

This tier is suitable for non-publically accountable entities and non-large entities with under $30 million annual expenses.  Unlike the full standards applicable in tier one, tier two is subject to a reduced disclosure regime.  This means that significantly less disclosures are expected, reducing the costs of preparing financial statements.

Tier three

This tier is suitable to charities with annual expenses under $2 million and without public accountability.  Charities that use accrual based accounting must report to this tier or the above tiers. Accrual based accounting records the revenue and expenses incurred by the charity at the time when they were earned or incurred (accrual).  Charities are able to use the simplified formatting standards with the assistance of specially designed templates and guidance notes for reporting on accrual based accounting.

Tier four

All charities with annual operating payments of less than $125,000 and without public accountability will have the option of reporting under tier four.  The simple formatting report under this tier will allow charities to continue using cash based accounting as long as operating payments are below the threshold for this tier.  Cash based accounting is typical in organisations where transactions tend to be small in scale and less complicated than that of larger scale transactions.  Transactions that are cash based are recorded at the time that cash is received or paid, rather than when earned or incurred.  If a charity currently uses accrual based accounting and would like to continue this method of recording then it will have to report to tier three regardless of whether their operating payments are below $125,000.  Operating payments do not include capital payments, for example the purchase of resources (physical assets or investments) or the repayment of borrowings.

Moving between tiers

The annual expenses or operating payments for a charity may change over time meaning the charity exceeds the requirements of the current operating tier.  In these circumstances, a charity may continue to report in their current tier for the accounting period and the following two accounting periods.   It is not until the third accounting period that it will have to report at a higher tier.  If a charity sits around the cost thresholds or fluctuates between the tier thresholds (and expects it will exceed the thresholds in the future) then a charity should consider reporting at another tier to avoid having to change reporting tiers at a later date.

This article is part one of a three part series.  The next article in this series will summarise the information that needs to be included in the new reports.

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

Recent amendments to the Income Tax Act 2007 create a tax exemption for charities that provide affordable housing.  Until the amendment, the provision of affordable housing was not seen as charitable. This is because it did not relieve poverty and there were associated private benefits to the housing provider (for example see Re Queenstown Lakes Community Housing Trust).  Organisations that only provided affordable community housing were not eligible for a tax exemption.

The Income Tax Act was amended with the introduction of new section CW42B, which created a general tax exemption for “income derived by a community housing entity”.  The section defines a community housing entity as a trust or company whose activities are predominantly for the provision of housing.  The entity must not carry out the activities for the private pecuniary profit of any individual or for the benefit of any individual who has some control over the activities; the profit must either be retained by the entity, or distributed to one of the following sources:

• Other community housing entities that meet the requirements under this section;
• Beneficiaries or clients of the entity;
• Tax charities (registered under the Charities Act 2005);
• For charitable purposes (as defined by law).

When the above threshold is met the entity will, on the face of it, be eligible for the tax exemption under this section.  However two exceptions are contained within the section.  Firstly, if less than 85% of the entities beneficiaries/clients are persons, or classes of persons described in the regulations then the entity will not be eligible for a tax exemption.  Secondly, if the beneficiaries /clients of the entity are substantially different from the persons described in the regulations, the entity will not be eligible for a tax exemption.  The problem with these exceptions being that the regulations are yet to be released (as at December 2014).

The general factors that may be used by the Minister of Revenue and Minister for Housing for creating the regulations have been released however.  The factors for determining the “persons or class of persons” for the purposes of assessing whether an entity is eligible for a tax exemption are:

• Each person’s location;
• The composition of each person’s household;
• The combined income of each person’s household must be below a maximum (yet to be set);
• The value of the assets held by each person (in relation to a cap yet to be set).

The regulations, when released, will detail what the relevant geographical locations, household compositions, and income and asset caps are.  Before the regulations are published it is difficult to speculate on where the line will be drawn in relation to each of these factors.  However we recommend that charities or other entities that may be affected by the changes begin collating this information.  When the regulations are released, the affected entities should seek advice on how the regulations will affect tax liability.

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