Category: Commercial

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.

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.

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.

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 (Charity Debt Securities) Exemption Notice 2013

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

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

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

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

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

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

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

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

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

• They provided debt securities under the 2003 Exemption Notice on or before 1 November 2013; and
• As at 1 February 2014, the amount owing under the outstanding debt securities together with the total amount of the debt securities being offered exceeds $15 million.

Financial Markets Authority – what information do they need?

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

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

Summary

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

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

Securities Act (Community and Recreational Purposes) Exemption Notice 2013

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

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

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

What does the Community Exemption Notice provide?

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

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

The rights listed under subclause (2) are:

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

Summary

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

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

Conclusion

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

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

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

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

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between the shareholders of a company outlining the rules, processes and framework for dealing with contentious matters that may arise, right through to outlining responsibilities for the day to day running of the company.

A shareholders’ agreement can include as few or as many matters as the shareholders wish, including but not limited to:

• The structure of the company;
• How the company is governed;
• Board meetings – when they happen and who must attend;
• Shareholders’ voting rights – whether they are all equal or not;
• How will the company raise capital;
• Distribution policy; and
• When shares can be issued or transferred.

It is important to note that a shareholders’ agreement is not only between the shareholders of the company but also incorporates the company itself as a party, therefore binding the company to act in accordance with its provisions.

Shareholders’ agreement v company constitution

The Companies Act 1993 (the Act) removes the obligation for a company to have their own constitution.  As an alternative, companies that do not have their own constitution are governed by the Act which sets out their rights, powers, duties and obligations, which is why the Act is commonly referred to as a company’s “default constitution”.

A company’s constitution and its shareholders’ agreement may contain similar provisions given both set out the rules and procedures for running the company.  However, there are important distinctions that differentiate the documents, which show that adopting a shareholder’s agreement is important:

• A shareholders’ agreement is a private document that is not registered at the Companies Office (unlike a company’s constitution).  This is considered the most advantageous reason for having a shareholders’ agreement, as all of the provisions remain confidential.
• Rights, powers and obligations relating to a company’s control are primarily outlined in a shareholders’ agreement, which  stipulates who governs the company and who is responsible for making specific decisions, e.g. changes to voting rights, decisions to wind up the company or decisions regarding the issuing/transferring of shares.  A constitution can contain similar provisions, however, these are usually less detailed and general in nature given that it is publicly available.
• The process involved for shareholders exiting a company is described in a shareholders’ agreement, which can be as detailed or as simplistic as required. The Act does not provide guidance for matters such as this, which may cause issues between exiting and remaining shareholders.
• A shareholders’ agreement can be entered into prior to a company being incorporated which can be extremely important where there are time constraints surrounding a transaction, (e.g. where the shareholders want to agree on the governing provisions prior to purchasing a business), whereas a constitution can only be adopted after a company has been incorporated.
• By default a company’s constitution can be changed by a special resolution (being 75% of the shareholders that are entitled to vote), whereas a shareholders’ agreement is more difficult to alter given the shareholders must unanimously agree to do so.

Should you have a shareholders’ agreement?

It is important to note that a shareholders’ agreement can contain a unique and tailored private set of rules that bind the shareholders and company to act in a way that is agreed to by all.

It is assumed that smaller, more intimate, companies do not require the additional expense of organising a shareholders’ agreement, however, in practice it is these types of companies that can benefit the most from a shareholders’ agreement where the relationships between shareholders need to be preserved.   Where a company has two or three shareholders that are actively involved in the management of the company, relationships can break down if there are no specific rules and processes to follow when contentious matters arise.  Additionally, where a company has a complex structure with multiple levels and types of shareholdings, a shareholders’ agreement is imperative.

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

Introduction

Since charities have had to register under the Charities Act to obtain charitable tax status, there have been a number of cases which have dealt with professional organisations.  At the heart of these cases is the issue of whether such professional organisations are for the benefit of their members or  the benefit of the public.

In August 2013, the High Court released its decision granting an appeal of the Plumbers, Gasfitters and Drainlayers Board (PGDB) against a decision of the Charities Registration Board (the Board) to deregister the PGDB.

Background

The PGDB was established under the Plumbers, Gasfitters and Drainlayers Act 2006 (the PGDA).  It was registered as a charitable entity by the Charities Commission on 30 June 2008 (since replaced by the Board).

The PGDA provides that the purposes of the PGDA are to protect the health and safety of members of the public by ensuring the competency of persons engaged in the provision of sanitary plumbing, gasfitting and drainlaying services and to regulate persons who carry out sanitary plumbing, gasfitting and drainlaying.

Section 137 of the PGDA sets out the extensive functions of the PGDB.  They essentially involve registration, licensing, education, qualification, complaints and prosecution.

The Charities Commission (as it was then known) received a complaint from a member of the public alleging that the PGDB was not entitled to be registered as a charitable entity.  The Charities Commission had to decide whether the PGDB’s purposes are charitable as falling within “any other matter beneficial to the community” – the fourth head of charity under the Charities Act.

The law

To be charitable within this head of charity, the purposes of the entity in question must confer a benefit on the public or a section or the public, and the purpose must come within the spirit of the preamble to the Statute of Elizabeth 1601.

The Preamble provides a list of charitable uses as follows:

The relief of the aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars in universities; the repair of bridges, ports, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock or maintenance of houses of correction; the marriages of poor maids; the supportation, aid and help of young tradesmen, handicraftsmen and persons decayed; the relief or redemption of prisoners or captives and the aid and ease of any poor inhabitants.

Interestingly, the Judge in this case did not put much emphasis on the Preamble, but instead focussed on the purposes of the PGDA.

The Board’s decision

The Charities Commission was replaced by the Board during the course of this case.

The Board determined that protection of the health and safety of the public through the regulation of the subject industries is not the PGDB’s exclusive purpose.  It found that the PGDB has an independent purpose, which is to regulate plumbing, gasfitting and drainlaying for the benefit of individuals working within the subject industries.  This was because of the considerable benefits conferred on those particular occupations.  The implication of this was that, according to the Board,  the PGDB was not entitled to be registered as a charity under the Charities Act.

This was a similar decision to that of the High Court in Re New Zealand Computer Society Inc.  In that case the importance of maintaining high standards in the IT profession could not be equated with the medical profession or the nursing profession.  The Computer society case demonstrates that generally an organisation that benefits its members will not be charitable.

There are a number of other similar cases which establish that organisations that are formed for the purpose of benefiting their own members are not charitable, unless they also hold purposes benefiting the public and the private benefits are merely incidental to those purposes.

In Commissioner of Inland Revenue v Medical Council of New Zealand, the Court of Appeal decided that, although the Medical Council‘s main purpose was the registration of medical practitioners, this purpose was charitable because it provided protection to the public regarding the

delivery of medical services. There was a clear and obvious public interest in ensuring high standards in the practice of medicine, and any benefit to medical practitioners was merely incidental.

The Board distinguished the PGDB from the Medical Council as the Medical Council was exclusively established for the protection of the public in relation to the quality of medical and surgical services. Benefits to the medical profession were incidental to that primary benefit to the public and not an independent purpose of the Council. Conversely, the Board found that PGDB has an independent purpose to regulate plumbing, gasfitting and drainlaying for the benefit of the subject industries.

The appeal

On appeal, the Judge reviewed the PGDA – constituting legislation of the statutory body – including reviewing the overall purpose of the organisation.  The Judge discussed that the list of functions (covering registration, licensing, education, qualification, complaints and prosecution) would provide benefit to those working within the subject industries.  However, the Court held that the main purpose of the PGDB is to maintain standards for the safety of the public.  Any benefits to individual members were ancillary.  The Judge relied on the Medical Council case and overturned the decision of the Board.

Commentary

Often when charitable organisations look to become registered, it is important that the focus is not solely on the words in the constituting document.  What the organisation actually does in practice is going to have far greater influence on the Board’s decision regarding whether to proceed with registration.  This case demonstrates the importance of both – the words in the constituting document played a significant part in the Judge’s decision.  The essence of this case is that the overall purpose of an organisation must be for the public benefit.  If there are benefits for a subset of the public as well, that may not necessarily affect the ability for an entity to be registered.

Charities Law in New Zealand is constantly evolving – even though the law in this area dates back to the 1600s.  The pace of change in the law is perhaps not in line with the rate society is changing.  For example, many members of the public could argue that maintaining high standards in the IT profession is for the public benefit in this day and age but obviously would not be within the spirit of the statute of Elizabeth, as was decided in the Re New Zealand Computer Society Inc.

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

Over the last few years the Waikato landscape has undergone some significant changes. The Wairere Drive Extension and the Waikato Expressway are just two examples of important projects helping to grow and connect the region.

The Public Works Act 1981 provides for the land needed for these projects to be accumulated and set aside for a number of years. This allows local councils to plan for the future and helps to ensure that these new roads and developments are able to go ahead.

It is important to consider the implications of the Act and stay informed about public works, in particular if you are purchasing or selling property.

What is the Public Works Act 1981?

The Public Works Act gives power to the Crown to acquire land for public works, and sets out the payments that may be made to the former owners of the land. The Crown may take land for a wide variety of purposes, such as the building of new roads, schools or parks. The Act does not authorise these projects, rather it provides for the acquisition of land, and land can only be acquired through the process set out in the Act. Land acquired in this way is referred to as ‘designated’ land.

Land Information New Zealand is responsible for administering the Act on behalf of the Crown. A number of organisations are able to apply for land under the Public Works Act. Usually these designating authorities will be State Owned Enterprises or territorial authorities such as your local or regional councils.

When land is required for a public work, the Crown will engage a Land Information New Zealand accredited supplier to carry out the negotiations.

Under the Public Works Act the Crown may choose to acquire the whole or just a specified part of the land.

Land acquired by agreement

The accredited supplier will obtain a valuation from a registered valuer. The owner of the property may also obtain an independent valuation from a registered valuer. These valuations are used for negotiation and agreement on compensation between the parties. The reasonable cost of this advice may be reimbursed if the advice is necessary to quantify the loss of the owner.

If parties cannot agree on the amount of compensation payable, the Land Valuation Tribunal may be used to decide the compensation.

Once an agreement has been reached by the parties, the accredited supplier will prepare an agreement for sale and purchase. When this agreement is signed, it becomes a binding contract. The land will be transferred to the Crown by the normal conveyancing process, with the land owner acting as the vendor and the Crown as the purchaser.

Compulsory acquisition

If a voluntary agreement between the parties cannot be reached, the Public Works Act provides for compulsory acquisition of land by the Crown.

If the owner of the land in question objects to the acquisition of the land by the Crown, an objection may be made to the Environment Court.

Compensation

Under s 60(1) of the Public Works Act affected land owners are entitled to full compensation for acquired land. The compensation provisions of the Act aim to ensure that land owners are left in a position that is no better or worse than their original position. Compensation is available to the owners of the land, as well as parties who have an interest in the land (such as a tenant), if that interest is acquired under the Act.

Compensation will usually consist of the value of the land. This is determined by considering what the land would be expected to sell for on the open market by a willing seller to a willing purchaser.

These include compensation for:

• Any damage caused by the acquisition to any remaining property;
• Any depreciation in the value of the land retained; and
• Any disturbances caused by the acquisition process.

Compensation for disturbance is inclusive of inconvenience, removal costs and contribution to valuation, legal and other professional costs incurred by the party.

How do I know what is happening in my area?

Often land owners are aware of these projects many years before construction begins. Owners are not able to claim compensation under the Act and then sell their property to a third party. The process under the Public Works Act means that the Crown becomes the new owner of the land.

If you are looking to purchase a property and are unsure about how these projects may affect your new property, it is advisable to do your research.

Websites such as Land Information New Zealand and New Zealand Transport Agency both provide up to date information and plans for these projects. A Land Information Memorandum (LIM) may also list any proposed or existing transport network projects in the local area.

The Public Works Act is a significant piece of legislation which helps to shape the local landscape. If you are considering purchasing or selling it is important to be aware of local developments and how these may affect your property.

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

Introduction

The Personal Properties Securities Register (PPSR) is an electronic register which allows a secured party to register the details of property that they have an interest in. For example, if a Bank (the secured party) lends money to a company, the Bank will take a charge over the company’s property, creating a security interest, until the debt is repaid. The Bank will then register its interest on the PPSR which gives notice to other parties that the Bank has an interest against the company’s property.

The purpose of the PPSR is to provide an avenue for individuals or companies who lend money or provide goods on credit to register their interest against the borrowers property as security. Dependent on what the parties agree, the secured party may register an interest against all the borrower’s assets or against specific assets e.g. a laptop, a car or a computer.

It is important to be aware of when the PPSR may be relevant as it acts as a notice board for both secured parties and purchasers (debtors).

Secured parties

Common situations where a security interest will be registered against property is when individuals or companies purchase property on hire purchase, or borrow money to purchase property such as a car. The secured party may register its interest against the car alone, or they may negotiate to register their interest against all of the borrower’s current and future acquired property, which is known as a ‘general security agreement’. A general security agreement most commonly arises when a company borrows from a finance provider and in return the financier will take a charge over all assets currently held by the company, and any future assets that are purchased.

Purchasing property

It is important for consumers to be aware that when they purchase second hand property, a secured party may have a security interest registered against property that relates to money borrowed from the previous owner. Irrespective if the property is bought in good faith and at market value, if a security interest is registered against the property and there is still an outstanding debt, the secured party has the right to repossess the property. For example, if John borrows money from the bank to purchase IT equipment, the bank would take security over the IT equipment until the debt was repaid. If the IT equipment was on sold to Jim and John’s debt was not repaid in full, the Bank would be entitled to repossess the IT equipment from Jim to repay John’s debt.

The PPSR is an imperative tool to notify prospective purchasers of any interests against property they intend to purchase, which may still have money owing, and can be repossessed.

Securing property

In situations where you are a secured party the Personal Property Securities Act 1999 (PPSA), sets out how to register your security interest against the borrowers property. The priority of your interest in the property is determined by the date you register your interest on the PPSR and not that date the parties signed the agreement. When registering your interest (registering your financing statement) you want to ‘perfect’ your interest. Perfecting your interest is the term used to determine whether you followed the right process to give you the first claim to the property, meaning you are the first to be repaid if the borrower defaults. There are two ways to ‘perfect’ your interest; you can ‘perfect by registration’ which gives you first priority if you are the first to register or ‘perfection by possession’. Although the PPSA does not define what actions must be taken for ‘possession’, leaving the property with the debtor after they have defaulted does not constitute possession. Therefore, as a minimum you must be seen to go through the appropriate channels to try and repossess the property.

Exception – PMSI

It is important to note there are exceptions to the ‘perfection’ rule. A common and very important exception to the priority rule is the Purchase Money Security Interest (PMSI). A PMSI is a security interest which gives superior priority over all other interests, even if there has been a financing statement registered against the same property at an earlier date. The requirement to claim a PSMI status will occur where the secured party has loaned funds to the borrower to purchase property, and the funds can be traced to show the property purchased was what the secured party intended to be purchased. This is an important requirement and is why the secured party will often pay the owner of the property directly to ensure the loan funds are used to purchase the agreed property. The second PSMI requirement is for the secured party to register their interest on the PPSR within 10 working days (perfection by registration) from the date the debtor takes possession of the asset (e.g., picks up the new car).

Another common example of a PMSI is where a secured party supplies inventory to their customers and retains ownership of the property until full payment is received. However, in most situations ownership is irrelevant when it comes to the PPSR as ownership will not protect either party if the correct perfection rules have not been adhered to.

If a secured party correctly complies with the registration requirements, a PMSI will take priority over all other security interests, including all interests that were registered prior to the PMSI.

In practical terms, it is important when purchasing second hand goods to check the PPSR register to ensure there are no interests registered against the property and run the risk of the property being repossessed. However, there are strict privacy conditions that determine who can search the register, they are as follows:

• You must have the consent of the individual/company who you are searching;
• The search is required to help you decide whether to lend or invest with the individual or company; or
• The search is required to establish whether there is a security interest over the property you intend to purchase.

You can check the PPSR by going online at www.ppsr.govt.nz or using your mobile phone (TXTB4UBUY).

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