The Government has announced a two-phase process seeking to reform corporate governance laws.

In the first phase the Government is looking to update corporate legislation to reflect modern business practices, make compliance simpler and deter and detect poor business practices. In other words, this phase seeks to resolve uncontroversial problems to improve the performance of our corporate legislation, and aspects of our insolvency law. The bill for these proposals is expected to be introduced in early 2025. We summarise the proposed key features below.

In the second phase, there will be a Law Commission review of directors’ duties, liability, offences, penalties and enforcement. This was announced earlier in the year: Law Commission to undertake project on directors’ duties, and will include consideration of the issues raised in the Mainzeal case, amongst others – see our summary of the Supreme Court’s decision here. This phase is intended to begin in the first half of 2025.

What the reforms cover

The first phase is proposed to consist of targeted improvements to the Companies Act 1993, the Insolvency Act 2006 and the Limited Partnerships Act 2008, with the focus being the Companies Act.

The Companies Act is the primary piece of legislation governing companies in New Zealand. It is now more than 30 years old and, while in many respects it is still fit for purpose, the Government has identified numerous aspects that can be modernised and improved.

The package of reforms is intended to make sure that the rules governing companies are clear, workable and fit for purpose. At a high level, the reforms are aimed at the following:

• Modernising the Companies Act: These changes better utilise modern technology and reduce compliance costs for companies and the regulator.
• Introducing a unique identifier for company directors and general partners: This will help with identifying business practices such as harmful phoenixing (see below). It will also permit directors and shareholders to replace their residential addresses with an address for service on the Companies Register. 
• Improving outcomes for creditors: These changes to insolvency law follow the recommendations of the Insolvency Working Group (which was set up in 2015 to look into aspects of New Zealand’s insolvency law).
• Improving uptake and use of the NZBN: These changes will make it easier for businesses to connect and transact with each other and the Government using the NZBN.

The reforms have numerous proposed changes to the legislation noted above, but of the more significant changes currently flagged are the following:

Phoenixing

Phoenixing refers to when a company fails with unpaid debts, and a new company is started with the same or similar name to the failed company to continue trading, sometimes with the assets of the failed company transferred to it for less than their value.

While the Companies Act does have provisions which can be used to bring enforcement action against persons undertaking these practices to defeat creditors, it is intended that by assigning a unique identifier to directors and general partners, it would make it easier to identify all of the entities with which a person adopting poor or harmful business practices is associated. In this way, it would also assist third parties with due diligence into such entities before working with or for them, as well as with enforcement action by regulatory agencies.

Director and shareholder addresses to be made private

The unique identifier has the added benefit of addressing safety and privacy concerns that directors have about their home addresses being publicly available on the Companies Office. This is something the Institute of Directors has long campaigned to be changed. With the introduction of a unique identifier, directors could opt to show an address for service instead of their home address on the Companies Office. It is also proposed to expand this protection to shareholders.

Insolvency matters

As noted above, the Government is proposing that the measures from 2015 Insolvency Working Group which have not progressed to date be included in this package of reforms. These measures include matters such as:

• changing the timeframes for voidable transactions, such as extending the period during which transactions with related parties can be voided to four years when a business is insolvent;
• expanding an existing employee payment preference to include long service leave and payments in lieu of notice; and
• introducing a requirement for companies that issue gift cards or vouchers, and enter liquidation or receivership but continue to trade, to honour at least 50% of their value.

Major transactions

In general terms, a company must seek shareholders’ approval at a threshold of 75% for a transaction worth more than half of the value of its gross assets. Two changes are proposed for the major transactions regime: 

• the Government proposes to clarify that transactions relating solely to the capital structure of a company, that is share issues, buybacks, dividends and redemptions, are not major transactions. These already have specific rules relating to them so do not need to be regulated by the major transactions regime; and 
• the major transaction regime is updated so that it captures a transaction or a related series of transactions that amount to a major transaction as well as those structured through a subsidiary of the company. This could possibly be achieved by aligning the regime to that under the NZX Listing Rules.

Obtaining major transaction approval can be a significant undertaking. Therefore, the added clarification from these amendments will be helpful for companies and their advisers to proceed with certainty.

Repeal of Companies (Directors’ Duties) Amendment Act 2023

The Government is proposing to repeal this Amendment Act, which amended the duty of directors to act in good faith and in the best interests of the company. The Amendment Act provided that “To avoid doubt, in considering the best interests of a company […], a director may consider matters other than the maximisation of profit (for example, environmental, social, and governance matters)”.

Reduction in share capital

Under the Companies Act, a company wishing to reduce its share capital other than through a buy-back must go through an expensive and time-consuming court process. The reforms propose a new method by which a company could reduce its share capital subject to board and shareholder approvals and a director solvency certificate.

This will be particularly helpful for widely held and listed companies which normally have to use the court process. In keeping with trying to minimise compliance costs for companies, the Government recommends not introducing a requirement for a separate independent appraisal report. This is also consistent with the practice adopted by the Takeovers Panel for Code Companies.

Unclaimed dividends

The Government is recommending that, in situations where a shareholder has not claimed a dividend after a period of two years, a company can mingle unclaimed dividends with its own money. The shareholder would retain their right to the dividend as a contingent liability, instead of a permanent liability under the current legislation.

Unanimous shareholder approval expanded 

A company can undertake various corporate actions in a simplified manner by obtaining unanimous approval of its shareholders (e.g. issuing shares, buying back shares, paying distributions, granting financial assistance to purchase shares etc). This proposal updates the regime to include actions that are of the same nature but were inadvertently missing from the class of actions that can be approved in this way:

• the issue of options or convertible securities; 
• crediting unpaid shares; and 
• the acquisition of shares to be held as treasury stock.

Other technical amendments

In addition to the above, various technical updates to the Companies Act and other legislation noted have been proposed to give effect to the Government’s goals.

These include changes such as those relating to e-filing, updating out of date financial thresholds, methods of document execution, and updating old corporate processes to reflect electronic transmission or modern practice, and to fix technical errors e.g. specifying timeframes for special meetings, simplifying constitutional drafting, removing limits on how companies can execute deeds etc.

Conclusion

This announcement marks the beginning of the process to modernise and streamline the Companies Act and related legislation.

As noted above, the bill for phase one is expected to be introduced in early 2025, with public consultation occurring thereafter at the Select Committee stage. We will continue to update you as we hear more, particularly when the draft bill is released. 

In the meantime, if there is anything you would like to discuss, please get in touch with one of our experts.