Welcome to Issue No. 14 of Corporate Reporter, Bell Gully's regular round-up of corporate and general commercial matters, designed to keep you informed on regulatory developments, legislation and cases of interest.
Items in this issue include:
New Ministry to proceed from 1 July 2012
Last week, the Government confirmed its plans to establish the new Ministry of Business, Innovation and Employment (MBIE) on 1 July this year. The Ministry will bring together the existing functions of the Ministry of Economic Development, Ministry of Science and Innovation, Department of Labour and Department of Building and Housing.
It is expected that the transition to the fully fledged MBIE will take up to 24 months. On 1 July the structure will be a 'federation' of the four existing agencies, with a new chief executive and a new set of acting second tier positions above the existing tier 2 positions. The Acting Chief Executive Designate will be David Smol, currently the Chief Executive of the Ministry of Economic Development.
A detailed organisational design and implementation plan for the new Ministry will be developed by 30 September 2012 following consultation with staff.
For further details, see the Government's press release here.
Select committee to report back on Consumer Law Reform Bill in August
The Commerce Select Committee is due to report back on the Consumer Law Reform Bill in August 2012, with submissions now closed on the Bill.
The bill reflects the outcomes of a review of consumer law initiated in 2009, and proposes the most significant changes to consumer laws in New Zealand in more than 20 years.
The Bill amends the Fair Trading Act 1986 (FTA), the Consumer Guarantees Act 1993, the Weights and Measures Act 1987, the Carriage of Goods Act 1979, the Sale of Goods Act 1908, and the Secondhand Dealers and Pawnbrokers Act 2004. It also repeals the Auctioneers Act 1928, the Door to Door Sales Act 1967, the Layby Sales Act 1971, and the Unsolicited Goods and Services Act 1975. The matters covered by the four Acts being repealed are incorporated into the amended FTA and a new Auctioneers Act.
Interestingly, in the first reading of the Bill the Minister of Consumer Affairs invited the select committee to consider whether the amendments proposed by the Bill for the FTA should include provisions to address unfair contract terms and unconscionability. These matters were raised during the consultation process, but did not make the cut for inclusion into the Bill.
For further details on the changes introduced by the Bill, see our earlier article Getting ready for the Consumer Law Reform Bill.
Update on the AML/CFT regime
At the end of last year the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) supervisors (the Department of Internal Affairs, Financial Markets Authority and Reserve Bank of New Zealand) published the AML/CFT Programme Guideline to assist reporting entities in developing their AML/CFT programme. The Guideline outlines the minimum requirements for an AML/CFT programme and explains who is responsible for a reporting entity's AML/CFT programme.
All reporting entities covered by the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 must be compliant when the remaining provisions of the Act and regulations come into force next year on 30 June 2013.
For further details on the new AML/CFT regime see Issue No. 10 of Corporate Reporter.
Update on changes proposed for the Companies Act
Various amendments to the Companies Act are currently making their way through the parliamentary process under the Regulatory Reform Bill and the Companies and Limited Partnerships Amendment Bill.
Regulatory Reform Bill expected to come into force soon
The Regulatory Reform Bill is now in the Committee of whole House stage and is expected to be passed soon. This is an omnibus Bill which includes amendments to the Companies Act. The key amendments clarify and confirm the lawfulness of electronic communication with shareholders and the provision for shareholder participation in meetings by way of audio, audio and visual or electronic means.
In practical terms the changes introduced by the Regulatory Reform Bill will allow companies to:
send all notices, statements, reports, accounts and other documents to shareholders and creditors by email, provided the recipient has notified the company that it wishes to receive such documents by electronic means;
utilise electronic voting systems; and
hold company meetings through new technology such as live streaming of meetings.
The Regulatory Reform Bill also:
repeals the requirement for listed companies to send each shareholder a notice advising that it has acquired its own shares on a stock exchange, as this is already covered by the NZX listing rules; and
removes the requirement for an arbitrator to set an interest rate where a company is buying out a minority shareholder and the buyout does not require arbitration.
Companies and Limited Partnerships Amendment Bill 2011 still waiting for first reading
The Companies and Limited Partnerships Amendment Bill was introduced at the end of last year and remains on the Government's list of bills to progress. At the time of its introduction the Government indicated that it would have its first reading early this year, but it seems to have slipped down the priority list since then.
In brief, this Bill amends the Companies Act by:
tightening the requirements around company registration and company directors to assist in the prevention of New Zealand companies being used for criminal activity in overseas jurisdictions;
criminalising the breach of two existing directors' duties (namely, the duty of directors to act in good faith and in the best interests of the company and the duty of directors not to agree to, or cause or allow, company business to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors). Both offences will require actual knowledge for criminal liability; and
prohibiting "code companies" (as defined in the Takeovers Code) from undertaking long-form amalgamations under Part 13 of the Companies Act and providing more rigorous voting thresholds and additional judicial oversight for court-approved schemes of arrangement, amalgamation, or compromise under Part 15 of that Act.
Further details of these proposed amendments are discussed in Issue No. 13 of Corporate Reporter.
Companies Amendment Act 2012
Some minor amendments were made to the Companies Act by the Companies Amendment Act 2012, which came into force on 25 February 2012 to:
address practical difficulties in applying liquidation processes to companies no longer on the register (see amendments to section 241 of the Act); and
repeal provisions that were redundant (sections 360 and 361) given that the register of companies is now kept in electronic form.
|In the courts||Top|
A recent High Court decision (Tiroa E & Te Hape B Trusts v Chief Executive of Land Information  NZHC 147 (the Crafar farms decision)) has considered the Overseas Investment Office's (the OIO) application procedures and considerations as they apply to "sensitive land" under the Overseas Investment Act 2005 (the Act).
The decision arose from the Ministerial decision in late January this year to accept the OIO's recommendation to grant an overseas applicant (Milk NZ) consent to acquire the Crafar farms (a collection of farms within one corporate group).
The Crafar farms were in receivership and were being operated below full production. Milk NZ promised to invest $14 million to bring the farms back to full production, claiming that this investment would benefit New Zealand and should be a factor taken into account for the purposes of satisfying the criteria for consent under the legislation.
The Minister agreed and counted this $14 million to restore the farms to full productivity as a benefit to New Zealand arising from the investment.
The question on review by the court
The decision was challenged on two grounds by a group of New Zealand purchasers making a competing bid for the Crafar farms. The second ground of review, and the topic of this note, was an allegation that the Minister had committed an error of law in counting Milk NZ's promised $14 million investment as a benefit to New Zealand arising from the overseas investment.
The Minister (and the OIO) had counted the $14 million benefit on the basis that this benefit was not available to New Zealand before the acquisition, i.e., while the farms were in the hands of the receiver. It was argued, however, that any purchaser would bring the farms back to full production and, therefore, Milk NZ's $14 million investment could not be said to create a benefit to New Zealand – that "benefit" would accrue whether Milk NZ bought the farms or not.
The court's decision
The court confirmed that the Act requires a causal connection between the investment and the benefit claimed.
Further, the court held that the test of causation requires a forward looking assessment comparing the benefits of the particular investment against what is likely to happen without the overseas investment, i.e., a "with and without" comparison. This has been described as a "counterfactual" test.
Applying this counterfactual test, if a benefit would accrue even if the acquisition did not proceed, it cannot be said to be caused by the investment. Accordingly, the court held that the Minister was wrong to count Milk NZ's $14 million investment as a benefit to New Zealand, since this investment would happen regardless of whether Milk NZ or someone else acquired the farms, i.e., it would arise in the counterfactual.
Importantly, the court did not rule out the possibility that the right "counterfactual" may be the "status quo" (i.e., the position before the transaction) in appropriate cases. Rather, the court found that in this case the Minister wrongly insisted on a status quo counterfactual.
Implications of the decision for sale processes
The main implication of the Crafar farms decision is that the Ministers must assess benefits as against the position likely to accrue absent the investment for which consent is sought.
While, as Justice Miller notes in the judgment, the Crafar farms decision may make it more difficult to buy distressed assets (in the sense that the benefits of bringing them out of distress may not be able to be counted), it does not follow that the hurdle will be materially higher for other investments.
For more detailed discussion on this case and the subsequent Ministerial decision, see Bell Gully's article: The Crafar farms sale: Are there new hurdles for overseas investors in "sensitive land"?
Panel consults on class exemption for changes of trustees of family trusts
In March, the Takeovers Panel issued a consultation paper Class Exemption for Trustees of Family Trusts which addresses changes of trustees of a family trust. The Panel is proposing that a class exemption be introduced to deal with bona fide reorganisations of a private family trust or an event outside the control of the trustees. Submissions closed on 13 April 2012.
New 'Code Word' published
In the latest issue of the Takeovers Panel's Code Word, the Panel addresses:
Click here to read this issue.
Financial Markets Conduct Bill continues its momentum through the system
The Financial Markets Conduct Bill is still on track to being enacted by the beginning of 2013. The Bill had its first reading in March 2012 and is now before the Commerce Select Committee. Submissions on the Bill closed on 26 April and the select committee is scheduled to report back to the House on the Bill in September 2012.
Whereas the Ministry of Economic Development's last consultation process on the exposure draft of the Bill was focused on the technical details of the Bill, the select committee's review of the Bill will also involve matters of policy. One area that has been signalled by the Ministry as a likely focus for the select committee concerns the significant movement from criminal liability to civil liability in the Bill and the change in focus for primary liability for disclosure failings from the directors to the issuer.
Last year, the Ministry of Economic Development also indicated that it would release a discussion document on the regulations under the Bill in mid-2012, with a view to finalising those regulations by mid-2013. The regulations will include detailed provisions for the new product disclosure statements, managed investment schemes, market services licensing and the regulation of alternative markets.
Report on Non-bank Deposit Takers Bill delayed
The Finance and Expenditure Select Committee's report on the Non-bank Deposit Takers Bill has been delayed and is now due to be reported to the House by 1 June 2012.
The primary purpose of this Bill is to implement the final components of the new regime for the prudential regulation of non-bank deposit takers (NBDTs), which arose out of the Government's 2005-06 Review of Financial Products and Providers. In 2007, the decision was taken to implement the regime in two stages. The first stage is in place by virtue of the Reserve Bank of New Zealand Amendment Act 2008 (now Part 5D of the Reserve Bank of New Zealand Act 1989). This introduced requirements in relation to credit ratings, governance, risk management, capital, related party exposures, and liquidity. This Bill covers the remaining elements of the regime. It incorporates all the existing prudential requirements in Part 5D, and imposes additional requirements including licensing, suitability assessments of directors and senior officers, and restrictions on changes in ownership, and gives the Reserve Bank increased powers to detect and manage NBDT distress and failure.
Written submissions made to the select committee on the Bill are available here.
Mixed Ownership Model Bill introduced for four state owned energy companies
In March, the Government introduced the Mixed Ownership Model Bill which provides for certain state owned enterprises to be removed from the ambit of the State Owned Enterprises Act 1986 (although sections 22 to 30(1) of that Act will continue to apply to the enterprises), the Official Information Act 1982 and the Ombudsmen Act 1975 to enable the Government to offer minority shareholdings in the companies.
Under the Bill, each of Genesis Power Limited, Meridian Energy Limited, Mighty River Power Limited, and Solid Energy New Zealand Limited will become a mixed ownership model company under a new Part 5A of the Public Finance Act 1989. However, it is the Government's intention that different provisions of the Bill will be brought into force on different dates (by Order in Council) so that the companies do not become mixed ownership model companies under Part 5A before a decision is made to proceed with a partial sale of shares in the relevant company.
Part 5A restricts the Crown from holding less than 51% of the voting rights in each of the companies and restricts non-Crown individuals and entities from holding more than 10% of the voting rights in each of the companies. The Bill also provides that nothing in new Part 5A permits the Crown to act in a manner that is inconsistent with the principles of the Treaty of Waitangi (in keeping with section 9 of the State Owned Enterprises Act).
The Bill has been referred to the Finance and Expenditure Select Committee, which will hear public submissions and then report back to Parliament before 16 July 2012.
For background information on this Bill see the Minister for State Owned Enterprises' press release here.
The following Securities Act class exemption notices came into force on 20 December 2011:
Securities Act (Multiple Participants Superannuation Schemes) Exemption Notice 2011
This notice replaces the Securities Act (Multiple Participants Superannuation Schemes) Exemption Notice 1998 (the 1998 notice) which exempted superannuation trustees, employers, and certain other participants in multiple participant superannuation schemes from various provisions of the Securities Act and Securities Regulations. This notice is on substantially the same terms as the 1998 notice. However, the notice relates to the Securities Regulations 2009 (rather than the Securities Regulations 1983). In addition, certain changes have been made to clarify the terms and conditions of the notice.
Securities Act (Directors' Certificates—Collective Investment Schemes) Exemption Notice 2011
This notice exempts, subject to conditions, the issuers of certain collective investment schemes from section 37A(1A)(c)(i) of the Securities Act 1978. The notice relates to the certificate that may be registered that allows the date of allotment of securities to be more than 9 months after the date of the statement of financial position referred to in the prospectus. Section 37A(1A)(c)(i) requires the directors of the issuer to state in the certificate that the financial position shown in the statement of financial position has not materially and adversely changed during the period from the date of the statement of financial position to the date of the certificate.
The first part of the exemption, in clauses 6 and 7 of the notice, is substantially similar to the recently expired Securities Act (Directors' Certificates—Collective Investment Schemes) Exemption Notice 2009, and requires issuers to provide interim financial statements. However, this exemption, in clauses 6 and 7, can be used only in respect of renewal certificates registered with the Registrar of Financial Service Providers before 31 December 2011.
The second part of the exemption, in clauses 8 to 10 and the Schedule of the notice, is new and requires issuers to provide scheme performance information, scheme statistics, and director certifications. These new exemptions can be used in respect of renewal certificates registered with the Registrar of Financial Service Providers on or before 31 March 2013.
Securities Act (Translated Advertisements) Exemption Notice 2011
This notice applies where fewer than two directors of an issuer are fluent in the language in which an advertisement is distributed to the public. The effect of the exemption is to allow the directors of the issuer, or their authorised agents, to complete the advertisement certificate required by regulation 30(2) of the Securities Regulations 2009 if the directors or agents have read, seen, or listened to a translation of the advertisement.
Class exemption notices up for review
FMA is reviewing 44 class exemption notices which expire this year. Two provide exemptions from provisions of the Financial Reporting Act 1993 for overseas issuers and the remainder provide exemptions from provisions of the Securities Act 1978. A summary of each of the expiring notices is available here.
Although law reform envisaged by the Financial Markets Conduct Bill may attend to some of the issues currently addressed by these exemptions, FMA is of the view that most of these class exemptions are likely to be required for a number of years given the timeframe anticipated for passage of the bill and providing for a transitional period. Accordingly, FMA is seeking submissions on all of the exemption notices and expects to complete the review of each exemption before it expires.
Exemption notices requiring significant review
FMA have identified a number of notices that require significant review. These include:
exemptions providing relief in relation to real property (e.g., the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002, the Securities Act (Real Property Developments) Exemption Notice 2002; and the Securities Act (Estates and Interests in Australian Land) Exemption Notice 2002);
exemptions relating to offers of securities for the purpose of reconstructions (e.g., the Securities Act (Amalgamations) Exemption Notice 2002, the Securities Act (Takeovers) Exemption Notice 2002, the Securities Act (Renewals and Variations) Exemption Notice 2001, and the Securities Act (Co-operative Companies) Exemption Notice 2002);
exemptions for deposit takers; and
exemptions that recognise securities offerings or financial reporting regimes on the basis of sufficiency of the regimes in foreign jurisdictions (e.g., the Securities Act (Overseas Companies) Exemption Notice 2002, the Securities Act (Overseas Listed Issuers) Exemption Notice 2002, the Securities Act (Australian Issuers) Exemption Notice 2002, the Securities Act (Overseas Employee Share Purchase Schemes) Exemption Notice 2002, the Financial Reporting Act (Overseas Companies) Exemption Notice 2007, and the Financial Reporting Act (Overseas Issuers) Exemption Notice 2009).
Notices identified as likely to be redundant
FMA's initial review has identified the following notices as redundant and it is seeking feedback on whether there are any ongoing reasons for them to be retained:
Securities Act (Certificates for Securities Transferred Electronically) Exemption Notice 2003;
Securities Act (Life Insurance Companies) Exemption Notice 2002;
Securities Act (NZX Issuers) Exemption Notice 2007; and
Securities Act (Superannuation Schemes – Summary of Financial Statements) Exemption Notice 2006.
The general timetable proposed by FMA for this review is summarised below.
7 May 2012
Written submissions due to FMA.
FMA will analyse the submissions and seek further comments or meet with particular submitters as required to clarify its understanding of the submissions and the implications of proposals raised for consideration.
June – August 2012
Proposals announced on exemptions for information to, and opportunities for further comment by, market participants, investors, advisers and representatives.
August – November 2012
Finalisation of drafting, granting of exemptions before 30 September 2012 or 30 November 2012 (as required).
|Financial Markets Authority (FMA)||Top|
New effective disclosure guidance note proposed for 1 June 2012
FMA has been consulting on a new guidance note for securities issuers, directors and their advisers on how to prepare and present effective prospectuses and investment statements.
Following comments from stakeholders on FMA's initial consultation paper and draft guidance note released in January 2012, FMA released a markedly different draft of the guidance note for further consultation and has invited feedback on the revised draft by 10 May 2012. A copy of the revised guidance note is available here. For details of this revised draft and latest consultation see our earlier note: FMA consults on revised Effective Disclosure Guidance Note.
The draft guidance note explains the approach FMA intends to take to reviewing prospectuses and investment statements and also provides its views on good practice for preparing these disclosure documents. FMA is particularly keen to ensure that:
the style and presentation of disclosure documents is clear so that investors want to read the documents and are less likely to be misled or confused when they do so;
full consideration has been given by issuers and their directors, and disclosure has been made, of all matters that are likely to be material to an investor considering investing in the particular offer; and
issuers and their directors are satisfied that disclosure documents are "holistically true" taking account of all the information available to them.
Under the current timeline, FMA proposes to use this guidance note from 1 June 2012 as part of its risk-based assessment of newly-issued disclosure documents (see further discussion of this in the item below). FMA is also encouraging continuous issuers to review their disclosure documents in light of the guidance note as soon as practicable, but continuous issuers do not have to update their disclosure documents until the next time they issue a new investment statement or register a new prospectus for the issue after 1 January 2013. This is an improvement on the initial draft guidance note which required continuous issuers to have updated all disclosure documents by 1 January 2013.
The guidance note will be subject to further change once the Financial Markets Conduct Bill is enacted.
FMA has also indicated that it will release guidance for securities offers promoted through advertisements (including websites) this year.
FMA's pre-registration prospectus vetting service ends
Since the introduction of the new prospectus registration regime in May 2011 (under the Securities Amendment Act 2011), FMA continued to carry out a limited pre-registration review process consistent with the review process previously undertaken by the Companies Office to support issuers in the transition to the new regime. This service ended on 30 March 2012.
FMA will continue to review prospectuses post-registration under its new risk-based framework. This includes any reviews performed under the consideration timeframe of five working days introduced by the Securities Amendment Act 2011.
Although the pre-registration vetting service has ended, FMA has indicated that it is still keen to engage with issuers before they register offer documents on novel products, strategic issues, complex or big issues or significant issues of securities (for example major IPOs). In such cases issuers are encouraged to contact FMA as early as possible but are told to be selective about the issues that they raise (for the simple reason that FMA does not have the resources to engage on every offer or concern).
It is also expected that the proposed new FMA Guidance Note on Effective Disclosure (discussed in the previous item) will assist issuers to ensure that their offer documents comply with the Securities Act and the relevant regulations.
Under the new risk-based framework for reviewing prospectuses post-registration, FMA aims to review 100 percent of high-risk prospectuses and 5 percent of other prospectuses post-registration.
For details of the new prospectus registration regime see Issue No. 8 of Corporate Reporter.
|Financial adviser regime developments||Top|
FMA has published guidelines for Authorised Financial Advisers (AFAs), clarifying FMA's expectations in connection with Code Standard 6(d) of the Code of Professional Conduct for AFAs, particularly in relation to public issues.
The guidance note aims to assist AFAs as financial markets participants in determining their responsibilities, and ensuring that their clients have sufficient information. It describes the factors and considerations AFAs should take into account in order to comply with Code Standard 6(d).
Click here to read the guidance note.
|NZX Limited (NZX)||Top|
NZX has released a consultation memorandum and proposed amendments to the NZX Main Board (NZSX) and Debt Market (NZDX) Listing Rules (listing rules) for public consultation. NZX is seeking comment on both the proposals embodied in the consultation memorandum and on the proposed amendments to the listing rules.
In addition to technical and typographical amendments, 23 substantive amendments are also being proposed by NZX.
New rule proposed to encourage gender diversity (amendment to listing rule 10.5.5)
In keeping with developments in other markets, NZX is proposing to introduce an additional disclosure requirement in annual reports of listed issuers relating to gender diversity. This will require issuers to provide a quantitative breakdown as to the gender composition of each of the issuer's board, senior management team and any subsidiary board. In addition, if the issuer has a diversity policy in place, the annual report is to include a statement from the board providing its evaluation of the issuer's performance with respect to its policy.
This proposal reflects a growing body of evidence that diversity in a variety of forms, and gender diversity in particular, contributes to improved performance at both board and senior management level.
NZX acknowledges that there are other ways of encouraging gender diversity on boards and is therefore also seeking feedback as to whether NZX's proposed approach is the generally preferred option.
Proposed amendments for the Corporate Governance Best Practice Code
NZX also proposes some amendments to the Corporate Governance Best Practice Code (Appendix 16 of the listing rules) which:
clarify that an issuer's nomination committee can be comprised of the same members as its remuneration committee;
provide that the Chair of the Board cannot also be the Chair of the Audit Committee;
require the remuneration committee's written charter to include details of its composition; and
require the remuneration committee to recommend remuneration packages for the CEO and senior executives of an issuer as well as for directors.
Other substantive proposals
Other proposed substantive amendments include:
The closing date for submissions is 30 May 2012.
For copies of the proposed amendments and further details on this consultation click here.
New NZX guidance note on allotment notices
NZX Market Supervision has issued a guidance note to address some uncertainty regarding the correct interpretation and application of NZSX/NZDX listing rule 7.12.1 and NZAX listing rule 7.11.1 (the rules), that require an issuer to provide NZX with an allotment notice whenever an issuer issues securities. In particular, the guidance note clarifies that the rules do not apply to the issue of debt instruments (including stock, notes and the taking of deposits) not quoted on a market operated by NZX.
The guidance note is available here.
|In the courts||Top|
In the past year a trilogy of failed finance company cases have come before the New Zealand courts, providing important reminders and lessons for directors as they seek to comply with securities laws and their duties as directors.
All three cases involved charges against directors of finance companies for defective disclosures in offer documents under section 58 of the Securities Act, and one case also involved charges of making false statements under the Crimes Act and the Companies Act.
For Bell Gully commentary on these cases, see our earlier articles:
Further clarity for directors' duties: The Moses case and the Steigrad case (aka Nathans and Bridgecorp) which discusses the convictions against the directors of Nathans Finance Limited under section 58 of the Securities Act for issuing offer documents containing untrue statements;
The Lombard decision: more important lessons for directors which discusses the convictions against the directors of Lombard Finance & Investments Limited under section 58 of the Securities Act for disclosure breaches in relation to an amended prospectus and three investment statements issued in December 2007; and
The Bridgecorp decision – more convictions for defective disclosures which discusses the liability of Bridgecorp Limited's directors under the Securities Act, the Crimes Act and the Companies Act for defective disclosures in offer documents issued in December 2006, six months before Bridgecorp collapsed.
What should directors take-out from these cases?
In brief, some key take-outs for directors arising from these cases include:
Strict liability offence but subject to materiality and due diligence defence: Directors may be criminally liable under section 58 of the Securities Act even if they acted honestly and were not reckless. The offence is a "strict liability" offence, with no form of mental intent required. However, this does not mean that if an offer document contains an untrue statement, the directors must be convicted, as one commentator has asserted. The directors have a defence if they prove on the balance of probabilities that the misstatement or omission was immaterial, or that they believed – and had reasonable grounds to believe – that the statement was true.
Disclosure of all material information: Offer documents must disclose "everything of relevance that is likely to be material to the investment decision".
The prudent but non-expert investor: The target audience for offer documents is a "prudent but non-expert person". Such an investor includes someone who understands technical words and financial jargon, but who may have "less than a complete understanding of all content" and who may not seek financial advice.
Exercise own judgment: Directors' obligations in relation to the accuracy of the content of offer documents are non-delegable. Directors ultimately must exercise their own judgment about the documents.
Reliance on management: Although directors can generally rely on information provided by management, they must adequately monitor and test the competence of management, and question the advice of management where they have other information that should put them on inquiry.
Absence of red flags is no excuse: Directors cannot rely on the absence of any red flags raised by professional advisers in substitution of their own duty to review the offer documents.
Timely and proper review required: Directors must ensure that they receive draft offer documents in sufficient time to properly review them (this is consistent with Australian case law: see our article Directors' Liability for Mistakes in Financial Statements).
Securities Act prevails: If there is a tension between downplaying risk to protect existing investors and shareholders and complying with the Securities Act, the Securities Act prevails.
Further judicial guidance on the horizon
The Bridgecorp decision will not be the last word on directors' obligations under the Securities Act. The Lombard directors have announced that they are appealing both their convictions and sentence, giving the Court of Appeal an opportunity to weigh in on the principles applied by the High Court in the Nathans Finance, Lombard Finance and Bridgecorp cases. In addition, although the directors of Hanover Finance are not facing criminal charges, the FMA has brought a civil claim against the Hanover Finance directors under the Securities Act in relation to alleged defective disclosures in that company's offer documents.
Bill proposes amendments to Commerce Act joint venture exemption
In addition to criminalising cartel behaviour, the Commerce (Cartels and Other Matters) Amendment Bill introduced at the end of 2011 proposes a new exemption for 'collaborative activity' which replaces the existing joint venture exemption in section 31 of the Commerce Act. The new exemption is intended to capture all pro-competitive arrangements, regardless of their form and is expected to provide a number of advantages over the current law, including providing greater certainty for businesses. For Bell Gully's commentary on this new exemption see our earlier article: The new JV exemption – the forgotten child.
The Bill is still awaiting its first reading. An opportunity to provide further submissions on the Bill will be available once it has been referred to the Commerce Select Committee.
For further information on the Bill see the article "Bill introduced to deter hard-core cartel behaviour" in Issue No.13 of Corporate Reporter.
|In the courts||Top|
Wool scouring appeal confirms Commission's authorisation approach
In November 2011 the High Court dismissed an appeal by Godfrey Hirst against a Commerce Commission authorisation for Cavalier Wool Holdings to acquire the wool scouring assets of Wool Services International. Given the paucity of M&A authorisations, the High Court's judgment provides an up-to-date guide for authorisation applications, particularly regarding the net public benefit test for acquisitions.
To read more on this decision see our earlier article here.
|New Zealand Commerce Commission (NZCC)||Top|
Selected Media releases
The following selected media releases have been issued by the NZCC:
Industry regulation and regulatory control
Commerce Commission finalises input methodology for approving Transpower's national grid spending
The process for approving investment in the national grid took an important step forward with the release of the NZCC's final determination of Transpower's Capital Expenditure Input Methodology. The Capital Expenditure Methodology replaces the former Electricity Governance Rules for approving Transpower's grid upgrade expenditure and integrates all regulation of Transpower's capital spending with Part 4 of the Commerce Act 1986.
Click here for more
Mergers and acquisitions
Seagate Technology granted clearance to acquire the hard disk drive business of Samsung Electronics
The NZCC has granted clearance for Seagate Technology Plc to acquire certain assets of the hard disk drive business of Samsung Electronics Co. Limited. In granting clearance the NZCC considered that there will be sufficient competition from existing participants in these markets to prevent the Seagate/Samsung entity from exercising any market power.
Click here for more
IAG granted clearance to acquire part of AMI Insurance
The NZCC granted clearance for IAG (NZ) Holdings Limited to acquire certain assets of AMI Insurance Limited. The acquisition involved the transfer by AMI of its business, excluding its Canterbury earthquake liabilities, to a newly created company. IAG has acquired 100 percent of the shares in this new company. AMI's Canterbury earthquake liabilities have been taken over by the Government.
Click here for more
Fonterra's proposed Kotahi joint venture unlikely to lessen competition – final decision by Commerce Commission
The NZCC has declined to authorise a proposed Kotahi Logistics LP joint venture between Fonterra Co-operative Group Limited and Silver Fern Farms Limited to coordinate domestic and international freight, as it found that the Joint Venture would be unlikely to harm competition, and therefore does not need an authorisation under the Commerce Act.
Click here for more
Southern Community Laboratories cleared to acquire Medlab South
The NZCC has granted clearance for Southern Community Laboratories Limited (SCL) to acquire 100 percent of the shares in Medlab South Limited from Sonic Healthcare (New Zealand) Limited. The proposed acquisition will result in the transfer to SCL of Medlab South's contracts with the Nelson/Marlborough and South Canterbury DHBs to provide pathology testing services.
Click here for more
Visy granted clearance to acquire HP Industries
The NZCC has cleared VRPS Limited, a subsidiary of Visy Industries Australia Pty Limited, to acquire certain businesses and assets of HP Industries Holding Limited and HP Industries (New Zealand) Limited. The businesses and assets relate to PET bottles, plastic containers, and plastic closures. The NZCC granted clearance on the view that if the merged entity tried to impose an unjustified price increase, customers would have the option of switching to an alternative supplier in the respective markets.
Click here for more
Statement of preliminary issues available for Universal/EMI clearance application
The NZCC has published a statement of preliminary issues relating to an application received from Universal Music New Zealand Limited seeking clearance to acquire up to 100 percent of the shares in the recorded music business of EMI Music New Zealand Limited.
Click here for more
High Court hands out $3 million penalty in refrigerator compressor industry cartel case
The High Court has imposed a penalty of $3 million against a major manufacturer of refrigerator compressors following a cartel investigation under the Commerce Act. The penalty was jointly recommended to the court by the NZCC and refrigerator compressor manufacturer Empresa Brasileira de Compressores S.A, following a settlement announced in October 2011 when the NZCC filed proceedings.
Click here for more
Commerce Commission publishes three decisions that implement Telco Act amendments
The first decision makes more than 400 substantive amendments to six Standard Term Determinations (STDs) which are necessary as a consequence of the structural separation of Telecom and associated legislative amendments.The second decision sets the price and non-price terms for a new service, the Unbundled Copper Low Frequency Voice Service.The third decision is a review of the unbundled copper local loop, unbundled bit-stream access and sub-loop services STDs to set geographically averaged prices for these services.
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Telecommunications benchmarking report shows New Zealand broadband pricing is improving but fixed line calling remains expensive
The NZCC has released its second report that benchmarks New Zealand prices for fixed line and mobile telecommunications services against international prices. The report found that for standalone broadband, New Zealand's pricing is not significantly higher than the international benchmark average for low and medium users, but that that for residential fixed-line voice services New Zealand prices are considerably higher than the OECD average.
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Commerce Commission releases final issue paper on high speed broadband demand-side study
The NZCC has released the last of three issues papers relating to the uptake of high speed broadband. Following a technical issues paper published on 19 December 2011, and an issues paper looking at e-health and e-education published on 24 January 2012, the paper looks at the willingness of consumers and businesses to pay for high speed broadband, and potential content and applications.
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Cross-net mobile traffic continues to increase
The NZCC released its third mobile monitoring report. The report shows a continuation of the narrowing between the costs of on and off-net calls and texts indicated in early reports. This has resulted in an increase in calling and texting between mobile networks.
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Commerce Commission dealing with daily deal sites at the source
The NZCC has stemmed a growing tide of complaints about daily deal and group buying websites with a proactive approach to educating the websites about consumer law.
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|Australian Competition and Consumer Commission (ACCC)||Top|
The following selected media releases have been issued by the ACCC:
Mergers and acquisitions
ACCC authorises alliance between Virgin Australia and Singapore Airlines
The ACCC has granted authorisation for Virgin Australia and Singapore Airlines to enter into an integrated network aviation alliance. Under the alliance, the airlines will cooperate on all aspects of their Australia – Singapore services and any international and domestic connecting routes, including joint pricing and scheduling and joint marketing and sales.
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ACCC not to oppose proposed acquisition of HP's PET and plastics assets by Visy
The ACCC will not oppose Visy Industries Australia Pty Limited's proposed acquisition of the PET and plastics assets of HP entities, which have had receivers and managers appointed. The ACCC found that customers had alternative options for the supply of PET and plastic containers which, though they are not currently as large as HP or Pact Group Pty Limited, still had the ability to expand to meet the requirements of medium to large customers meaning that they were likely to provide a constraint on the merged firm.
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ACCC proposes to authorise corporate alliance between Virgin Australia and Skywest airlines
The ACCC issued a draft decision which proposes to grant authorisation to a Corporate Alliance between Virgin Australia and Western Australian carrier, Skywest. The Corporate Alliance will allow the airlines to offer bundled air passenger transport services to corporate customers who seek an integrated suite of charter, domestic and international services, such as mining companies with large fly-in-fly-out workforces.
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ACCC not to oppose Amcor Limited's proposed acquisition of Aperio Group Pty Limited
The ACCC announced that it does not propose to intervene in Amcor Limited's proposed acquisition of Aperio Group Pty Limited. After an extensive investigation, including the publication of a Statement of Issues on 23 February 2012, the ACCC formed the view that the proposed acquisition would not result in a substantial lessening of competition in any market. Amcor and Aperio currently both supply flexible packaging, primarily to fast moving consumer goods manufacturers.
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ACCC not to oppose AUSTAR acquisition after undertaking resolves concerns
The ACCC will not oppose the proposed acquisition of AUSTAR United Communications Limited by FOXTEL Management Pty Limited after accepting court-enforceable undertakings from FOXTEL. The undertakings will prevent FOXTEL from acquiring exclusive internet protocol television rights for a range of attractive television program and movie content.
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Ticketek Pty Limited penalised $2.5 million for misusing its market power
The Federal Court in Sydney has penalised Ticketek Pty Limited $2.5 million for taking advantage of its market power following action by the ACCC. The court found that on four separate occasions Ticketek engaged in conduct with the anti-competitive purpose of deterring or preventing Lasttix from supplying its services. Lasttix offers promotional services to event organisers to target consumers wanting to buy 'last minute' discounted tickets.
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ACCC takes court action against Flight Centre Limited
The ACCC has instituted proceedings in the Federal Court in Brisbane against travel agency Flight Centre Limited, alleging that it attempted to induce competitors to enter into price fixing arrangements with it. The ACCC alleges that, on six occasions between 2005 and 2009, Flight Centre attempted to induce international airlines Singapore Airlines, Malaysian Airlines and Emirates to agree to stop directly offering and booking their own international airfares (including over the internet) at prices less than Flight Centre offered.
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ACCC wins appeal against Google
The Full Court declared that Google had engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in breach of section 52 of the Trade Practices Act 1974."Google's conduct involved the use by an advertiser of a competitor's name as a keyword triggering an advertisement for the advertiser with a matching headline. As the Full Court said this was likely to mislead or deceive a consumer searching for information on the competitor," ACCC chairman Rod Sims said.
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ACCC issues draft guidelines on non-discrimination for National Broadband Network and superfast telecommunications networks
The ACCC released draft guidelines on the non-discrimination provisions contained in Part XIC of the Competition and Consumer Act 2010. The draft guidelines reflect the ACCC's approach to interpreting and enforcing the non-discrimination provisions and are designed to provide guidance to industry on when providers such as NBN Co may negotiate different supply terms with their customers.
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ACCC accepts Telstra's structural separation undertaking
Telstra submitted its structural separation undertaking to the ACCC as a result of the legislative framework established in the package of telecommunications reforms introduced by the Federal Government in 2009. The undertaking implements structural separation through migration to the national broadband network.
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ACCC issues MTAS final access determination
The ACCC has released a final access determination for the domestic mobile terminating access service (MTAS) following consultation with stakeholders. The MTAS is a technology-neutral wholesale input, used by providers of voice calls from fixed line, mobile and IP networks, in order to complete voice calls to end users directly connected to digital mobile networks.
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Harvey Norman Holdings Limited penalised $1.25 million for misleading advertising
In September 2010, Harvey Norman promoted the sale of 3D televisions in a '3D Finals Fever' catalogue. The ACCC argued that the catalogue created the misleading and deceptive impression that consumers in all places where the catalogue was distributed could buy and use a 3D television to watch the 2010 AFL and NRL grand finals in 3D format where in fact, the 3D broadcast was limited only to particular metropolitan areas.
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Full Federal Court orders Optus to pay $3.6 million penalty
The Full Federal Court ordered Optus to pay $3.61 million in civil pecuniary penalties in relation to advertising for the 'THINK BIGGER' and 'SUPERSONIC' broadband internet plans. This judgment follows a successful appeal by Optus against orders made by Justice Perram that Optus pay civil pecuniary penalties totalling $5.26 million for breaches of the Trade Practices Act 1974.
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Consultation on the Government's proposed changes to the ETS
Last month, the Government released a consultation document setting out its proposed changes to the New Zealand Emissions Trading Scheme (ETS). This follows the first mandatory review of the scheme last year by the ETS Review Panel which recommended several refinements to the scheme, including extending the transitional implementation phase of the scheme and changing aspects of how forestry is treated. For full details of the outcome of this review see Issue No. 12 of Corporate Reporter and the Panel's final report, "Doing New Zealand's Fair Share" Emissions Trading Scheme Review 2011.
The key changes proposed by the Government are to:
phase out the 'transition measures' more gradually from 2013 to 2015 (currently, these measures are due to expire on 31 December 2012) to reduce the impact of the scheme on businesses and households;
maintain the $25 fixed price option per tonne of carbon emitted for business until at least 2015, rather than accepting the Panel's recommendation to increase the fixed price by $5 each year;
introduce more explicit powers to enable auctioning of NZUs within an overall cap subject to further consultation on the detailed settings;
provide a power for appropriate quantitative restrictions on the use of international units subject to further consultation on details;
provide more flexibility to convert land to its highest value use by allowing for the 'offsetting' of deforestation on pre-1990 forest land, and be consistent with the international flexible land-use rules agreed in Durban;
in light of the introduction of pre-1990 forest 'offsetting', which will significantly reduce deforestation liabilities under the ETS, review the number of compensatory NZUs provided to pre-1990 forest landowners;
provide for a power to delay the entry of emissions from animal livestock and fertiliser use for up to 3 years if certain criteria are not met, following a review in 2014; and
provide for a power to extend, if necessary, the fixed price option beyond 2015 and align it with any price ceiling in Australia if New Zealand links with the Australian scheme.
Consultation on the proposed changes will run until 11 May 2012, with a series of nationwide hui/meetings planned for interested parties.
Click here for further details.
Consultation on Crown Minerals Act regime
In March 2012, the Minister of Energy and Resources, Hon Phil Heatley, released a discussion paper seeking feedback on a suite of proposed changes to the Crown Minerals Act 1991 and associated regulations and minerals programmes.
The Crown Minerals Act regime regulates the exploration and production of Crown-owned mineral resources, including oil, gas and gold, and most minerals on Crown-owned land. The review aims to ensure the development of Crown-owned minerals contributes to New Zealand's economic development, the legislation is up-to-date and able to deal with future developments, and that regulatory agencies are well-coordinated on health, safety and environmental matters.
Key proposals in the discussion paper include:
developing a front-end process to ensure companies' health, safety and environmental capabilities are well known as they enter the permitting process;
ensuring regulatory efforts are proactive, co-ordinated and focus on operations that have the highest technical and geological complexity, and that generate the bulk of royalty income;
developing a pragmatic, streamlined management regime for low-risk activities associated with minerals like industrial rocks and alluvial gold; and
improving dialogue concerning the Crown Minerals Act regime between regulatory agencies, iwi and other important stakeholders.
For Bell Gully commentary on the discussion paper see our earlier article Crown Minerals Act review – a step forward.
'Agreed' international rules for forestry may have a significant impact on New Zealand's liabilities
Earlier this year, the Ministry of Foreign Affairs and Trade (MFAT) held a useful 'debriefing' about the international 'agreement' reached by the parties to the United Nations Framework Convention on Climate Change and the Kyoto Protocol.
MFAT officials advised that there has been a 'gentlemen's agreement' for a second commitment period of Kyoto Protocol, which is to start on 1 January 2013 and end on 31 December in either 2018 or 2020 (the end date is yet to be agreed). For further details click here.
|Electricity Authority developments||Top|
Electricity Authority release draft guidance on new 'stress testing' regime
The Electricity Authority recently released draft guidance on the application of a new 'stress-testing' regime implemented under the Electricity Industry Participation Code (the Code). The regime imposes new disclosure requirements on entities that either consume electricity that is conveyed directly from the national grid, or buy electricity from a clearing manager (i.e., those entities exposed to spot price risk). Whilst the Code was amended in December 2011 to require these new disclosures, the Authority does not expect the regime to be fully implemented until mid-2012.
This draft guidance indicates that disclosing entities will be required to disclose quarterly information about the projected effect of certain 'stress tests' on variables such as cash flows and the value of electricity bought and sold from/to the clearing manager. The draft stress tests set out by the Authority cover scenarios such as a sustained national drought or unexpected short term capacity shortage. These stress tests are performed using parameters (such as duration of event and average spot price over the period) set out by the Authority at least 30 days prior to the commencement of the following round of quarterly disclosures. In addition to these stress tests, entities will be required to state their target level of risk exposure so this can be compared against the actual level of risk calculated under the stress tests.
The purpose of this disclosure regime is to ensure that entities exposed to spot price risk understand the potential consequences of their exposure. In this sense the regime appears to be a response to a perceived 'overexposure' of electricity market participants to spot prices, and a means of encouraging increased use of hedge contracts. At this stage the Authority has announced no plans to impose limits on exposure to spot price risk, so the regime seems to be merely a means of requiring entities to acknowledge and calculate the risks they are exposed to. The Authority also plans to use the data collated from these disclosures to track risk exposure trends and allow entities to compare their exposure to the market average.
|In the courts||Top|
Genesis to appeal High Court decision on UTS
Genesis Energy Limited (Genesis) recently announced plans to appeal the High Court's finding that the Electricity Authority correctly concluded that an undesirable trading situation (UTS) occurred on 26 March 2011. No details have been released regarding the grounds for the appeal.
It has been reported that Todd Energy Limited and Contact Energy Limited will not be appealing the High Court decision.
In February, Justice Ronald Young in the High Court ruled that the Electricity Authority was entitled to conclude that a UTS existed when wholesale electricity prices spiked to over $23,000/MWh. Central to this decision was the finding that a number of factors existed on 26 March 2011 which, when taken together, were capable of amounting to a UTS. This was the case even though the court accepted that many (if not all) of the factors, if considered in isolation, were insufficient to constitute a UTS. The relevant factors in determining the existence of a UTS included:
the fact that Genesis was in a net pivotal position on 26 March 2011;
the fact that spot prices on that day reached unprecedented levels; and
that the market had inadequate information on which to base their economic decisions.
If Genesis is granted leave to appeal, the Court of Appeal's decision will provide useful guidance on the application of the Electricity Industry Participation Code, which took effect in November 2010.
We will keep you posted with any further developments.
In addition to the Corporate Reporter, Bell Gully also produces one-off client updates on corporate matters of particular significance. During the period covered by this issue of the Corporate Reporter we have published the following client updates:
The Bridgecorp decision – more convictions for defective disclosures
In the latest criminal case against the directors of a failed finance company for defective disclosures in offer documents, directors of Bridgecorp Limited were found guilty of offences under the Securities Act, Crimes Act and Companies Act. Read on
Incorporating Interim Milestones into an IT Contract
A recent decision of the UK Technology and Construction Court shows the importance of providing clear and contractually binding project milestones in any IT contract. Although the case relates to a dispute between a primary contractor and a subcontractor on a construction project, the similarities between construction and IT contracts means that the case is of equal interest to both customers and suppliers in the IT industry. Read on
Draft New Zealand Cloud Computing Code of Practice
The New Zealand Computer Society Incorporated released a draft New Zealand Cloud Computing Code of Practice for consultation on 19 March 2012. New Zealand is one of the first countries to develop such a Code, following the introduction of a Code of Practice in the United Kingdom in 2010. Read on
Crown Minerals Act review – a step forward
The discussion paper for the review of the Crown Minerals Act 1991 has been released. Overall the changes proposed in the discussion paper are a step forward towards improving and simplifying the regulatory environment for petroleum and mineral operations in New Zealand. Read on
The Lombard decision: more important lessons for directors
The High Court has again found that the directors of a failed finance company are guilty of breaches of the Securities Act. As was widely reported, on 24 February 2012 the directors of Lombard Finance and Investments Limited were found guilty of charges arising from untrue statements made in offer documents. Read on
Overseas defendants and the long (jurisdictional) arm of the law
Commerce Commission v Deutsche Bahn AG & Ors (High Court, Auckland, CIV-2010-404-005479, 12 October 2011, Justice Venning) represents the latest challenge by an overseas defendant to the jurisdiction of New Zealand courts over alleged anti-competitive conduct occurring overseas. Read on
Doing Business in New Zealand: a guide
Bell Gully has updated its guide to doing business in New Zealand in response to demand from overseas investors and their professional advisers for information about investing in and trading with New Zealand. Click here for a copy of the Guide
Regulatory Standards – the path forward
The National and ACT parties have agreed to progress a watered-down version of the Regulatory Standards Bill. As we reported at the time of its introduction and referral to Select Committee, the bill proposed to implement the recommendations of the Regulatory Responsibility Taskforce by, among other things, affirming certain principles of responsible regulation and providing for limited accountability mechanisms to encourage governmental compliance with those principles. Read on
NEED MORE INFORMATION?
For more information on any of the items in the Corporate Reporter, please contact your usual Bell Gully adviser or any member of Bell Gully's Corporate, Commercial or M&A teams. Alternatively, you can contact the editor Diane Graham by email or call her on 64 9 916 8849.
© Bell Gully 2012