Capital Markets – is our Companies Act holding us back?

I remember when the new look Companies Act came into force.

It turned out that 1993 would be my last year at university, forgoing the opportunity to continue completion of a Law/Commerce double degree in favour of testing my mere B.Com credentials. Even back then, I questioned the value of civil remedy that could only be attained by the limited few who could afford it.

A lot has changed since 1993. Yet, the Companies Act 1993 lives on. It is unfair to imply, however, that the Act has remained unfettered by time. Fortunately – or perhaps not – there have been plenty of amendments to it to ensure that it is fit for purpose for a modern age, covering everything from insolvency (Insolvency Act 2006) to Russian sanctions (Russian Sanctions Act 2022) and everything in between. Let’s be clear though – I am no lawyer. That much will be obvious to any actual lawyers who choose to read on beyond this paragraph.

The commentary below is based on a merely practical hypothesis from a layperson’s perspective – that our Companies Act does not train organisations well for the rigours of a listed environment, nor does it offer sufficient protections to shareholders of widely-held companies that choose to remain unlisted. The intent is simply to raise a conversation; what are the appropriate settings that delineate the extent of compliance requirements for directors of companies in unlisted and listed markets?

Application and Impact

Now, for avoidance of doubt – I’m not talking about the (many) small companies in New Zealand that operate with only a few, family-based shareholders. The rules seem fit for purpose; and in any case, fall outside the scope of NZSA’s concern. NZSA’s issue relates to those companies that have many shareholders – but are not listed and therefore not subject to the rules associated with any regulated or recognised exchange.

Unlike issues raised within public capital markets, issues related to the unlisted market are an area where NZSA is unable to advocate for shareholders or positive outcomes.

Inland Revenue defines a widely-held company as a company comprising 25 or more shareholders. The reference to large company in the Companies Act does not consider shareholders; rather, it considers thresholds specified in the Financial Reporting Act relating to turnover or number of employees. In theory at least, the sections of the Companies Act relating to the rights of shareholders do not differentiate based on the number of shareholders. Your rights as a shareholder in a company that has raised capital from a wide range of public investors could conceivably be the same as your rights in your family business.

Provisions that result in reduced protections for shareholders were possibly undertaken with the best of intentions. For example, a 2014 amendment enabled via the Financial Reporting Act allows large companies to ‘opt out’ of providing audit records, with approval of 95% of shareholders. All well and good, one might say, in the context of reducing the compliance burden on a large corporate entity. Others might suggest that shareholders approving such a measure are akin to turkeys voting for Christmas. Regardless of the pros and cons of the details, the systemic consequence of such a measure is to unconsciously affect the culture of corporate governors and managers running these types of entities – engendering a cost and compliance minimisation approach that is hardly likely to encourage capital growth or build the capability required to seek large-scale capital and build the ‘investor ethos’ required to succeed in public markets.

NZ corporate leaders and business commentators oft lament the lack of productivity (real or perceived) amongst NZ organisations. A plethora of cost-focused smaller entities, making trade-offs in favour of reduced compliance as against an ability to enable serious growth, is hardly likely to enhance productivity through developing scale.

As an aside, recent changes to the Incorporated Societies Act appear to have recognised the issue – the reporting obligations of your local community theatre group, as governed by the tiered requirements of the External Reporting Board, offer greater transparency and accountability to members than the obligations of a widely-held, unlisted company offers to its shareholders.

There are other areas of concern too. Such as the provision provided under s.120 that allows the Board of a company to not call for an annual meeting, if they deem that there is nothing to discuss or be voted on or if the company’s constitution does not require one. Perhaps appropriate for a husband-and-wife corner dairy, but less appropriate as the legal framework governing widely-held companies. For investors, shareholder meetings are a bit like a warm blanket on a cold night; we might not always utilise them, but its good to know they’re there.

Or perhaps it is the independence of directors in your privately-held unlisted company that keeps you up at night? To what extent do such private companies offer transparency as to the assessment of status they have afforded their directors; how can minority interests be assured that their interests are effectively represented? Answer: they can’t. While there are provisions in the Companies Act relating to conflicts of interest, it is still a caser of “trust us” when it comes to the application of unfettered and independent judgement in decision-making – the true benchmark of director independence.

What about Director remuneration? The provisions in the Companies Act expressly allow for remuneration, but tellingly refer to the Board as the body that has the ability to authorise remuneration. As shareholders, there is no right to have a say on the remuneration offered to directors – a stark contrast to the regular votes on director fee pools or payments prevalent in public markets. For a widely-held private company, it is hard to think of an argument against shareholders being offered the ability to approve remuneration.

Last, but not least, let’s think about the recent climate-related disclosure framework, requiring companies with a market capitalisation threshold of $60m or more to complete the required disclosures. Implicit in that requirement is the expectation that it’s only publicly-listed companies that need to do this.

Yet again, the differential between private and public markets grows ever steeper.

NZSA supports broader-scope environmental sustainability reporting (including climate change), as it enables investors to understand environmental impacts as part of the wider set of risks and opportunities that may impact their investment. But why should this only apply to publicly-listed entities? Surely, the disclosure of environmental sustainability reporting should be the same regardless of whether you are NZX-listed Fletcher Building or (unlisted) Fulton Hogan.

Private v Public

In that context, is it any wonder that we wonder why we suffer a dearth of public listings? Why the flight to private capital continues unabated, even if that provides far less transparency for investors?

And it’s that latter point that forms the contextual reference for NZSA. NZSA has fought long and hard over the years to ensure better protection and a more effective Board culture when it comes to investors. From our perspective, the answer is not to reduce those protections in public markets – but to update the Companies Act to catch up with investor expectations in 2023.

In addition to increased investor expectations and public market standards, the plethora of investing options for New Zealanders has changed dramatically since 1993. What was once appropriate as “one size fits all” is clearly not relevant 30 years later.

Investors already see a limited choice for public market direct investment in New Zealand. Many investors may already have a stake in private capital, either through a private equity fund or as a direct wholesale investor. One would hope that investors have a full appreciation of the risks, not that ‘hope’ should ever be a strategy.

NZSA’s message for our Ministers (and potential Ministers) – let’s not tinker around the edges of an Act that no longer caters for how the investment industry has developed over the last 30 years. Rather than a measured, linear progression of corporate capability that would provide a pathway towards capital markets, New Zealand’s corporate managers, entrepreneurs and directors who have the potential to grow face a sudden barrier; it’s too easy in that context to say ‘no’ to public markets.

Investors deserve better. It’s time to move on from 1993.

Oliver Mander

Oliver is the Chief Executive of NZSA. He is clearly not a lawyer.

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