Business Law Reform Bill 2003: Proposed changes

Brynn Gilbertson, Partner | Thursday 18 September 2003

The Business Law Reform Bill 2003 (the Bill) was introduced into Parliament on 13 June 2003 and is designed to produce clear, efficient and effective business law by incremental steps.

The Bill is now before the select committees and the Commerce Select Committee report is due on 23 December 2003.

It includes amendments to the Companies Act 1993 and the Securities Act 1978 designed to:

• clarify and update the law affecting businesses;
  
  
• remove conflicts between legislation; and
  
  
• reduce compliance costs.

Principal Companies Act and Securities Act changes

Specific changes to the Companies Act and Securities Act will be of particular importance to businesses:

Companies Act 1993

• Clarification of matters to be considered when assessing the value of contingent liabilities for the purpose of determining whether a transaction is a major transaction.

Securities Act 1978

• Further definition of the classes of persons to whom an offer can be made without that offer being deemed an offer to the public.
  
  
• Revisions to the limited statements an issuer is permitted to make prior to registration of a prospectus.
  
  
• New provisions for permitted indemnities and insurance for certain costs of directors, employees and auditors of issuers.

Companies Act 1993

Major transactions - valuing contingent liabilities

The Bill seeks to clarify how contingent liabilities should be valued when assessing whether a transaction is a major transaction under section 129.

The purpose of this amendment is to reduce the confusion that has arisen as to how contingent liabilities should be valued under section 129.

It is proposed that when valuing a contingent liability directors:

• must have regard to all circumstances that the directors know, or ought to know, affect, or may affect, the value of the contingent liability; and
  
  
• may rely on estimates of the contingent liability that are reasonable in the circumstances; and
  
  
• may take account of:
  
  
  • the likelihood of the contingency occurring; and
    
    
  • any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability.
  
  
  These guidelines substantially replicate the factors currently applicable for the "solvency test".

Securities Act 1978

Public Offers of Securities

Identifying what exactly constitutes an "offer of securities to the public for subscription" is central to the operation of securities law in New Zealand.

Offers of securities to the public for subscription are required to be made in a prospectus and investment statement which discloses all information necessary for a member of the public to assess the offer.

Currently, offers may be made without such disclosure documents under three exceptions, and these exceptions have been the subject of much litigation.

The proposed amendments seek to codify the common law position that has been established through litigation, which will provide greater certainty for issuers.

1. Relationship to a director of an issuer
   
   Currently, offers made to relatives and close business associates of an issuer are exempt from the disclosure requirements. "Close business associates" have been defined as requiring a degree of intimacy or business friendship. It is proposed that the exception be extended to include "close business associates" and relatives of directors of an issuer.
   
   
2. Wealth and experience
   
   Two new subsections seek to exclude offers made solely to wealthy persons experienced in investing and/or persons experienced in the industry or the business to which the security relates.
   
   This change is an extension to the exception for professional and/or habitual investors, on the basis that wealthy and experienced persons do not require additional statutory protection.
   
   The Bill identifies dollar amounts that determine whether a person is wealthy. A person will be wealthy if the person has, no more than six months before the offer is made:
   
   
   • net assets of at least NZ$2,000,000; and
     
     
   • an annual gross income for each of the last two financial years of at least NZ$200,000,
     
     

   (as certified by a chartered accountant).

   The definition of 'experienced' outlines factors for the assessment a person must be able to make of the offer before they qualify for the exception. These factors limit persons who can be considered as 'experienced' and have been taken largely from current case law.
   
   They include the ability to assess the merits of the offer and the risks involved in accepting the offer. The factors provide that something greater than participation in an industry is required for the exception.
   
   For example, the investors in the Kiwi case (dairy suppliers and shareholders) would have had experience in the industry to which the securities related, but this experience would not place them in a position to have information to assess the offer.

Pre-Prospectus advertising

The Bill plans a repeal of the existing pre-prospectus advertising exception. This specifies situations in which limited statements about an offer do not constitute an offer of securities to the public.

The replacement provision proposes to expand and refine the concept of pre-offer or limited statements of an intention to make an offer of securities. There are four key aspects to the proposed provision for pre-offer advertisements:

• Limited statements must state that no money is currently being sought and that no applications for securities will be accepted or money received unless the subscriber has received an investment statement.
  
  
• Limited statements may contain a statement that the issuer is seeking preliminary indications of interest.
  
  
  • If expressions of interest are sought, the pre-offer statement must state how indications of interest can be made and that no indication will involve any obligation or commitment.
    
    
  • This amendment reflects the Securities Commission's developing exemption policy to permit such invitations. It potentially reduces compliance costs by removing the need to seek an exemption for invitations seeking expressions of interest at the pre-offer stage.
    
    
• The Bill clarifies the existing provision for pre-offer advertisements by specifying that a pre-offer statement cannot contain information other than the items listed, but it may contain any or all of those items.
  
  
• The pre-offer advertisement must be dated and distributed no later than six months after its date.

The Bill will increase the certainty related to pre-prospectus advertising by creating an automatic right to advertise for indications of interest, and increase certainty for the issuer as to the success of the proposed offer.

Permitted indemnities and insurance

The Bill proposes replacement indemnities and insurance provisions to reconcile the provisions in the Securities Act 1978 with the corresponding provisions in the Companies Act 1993, thus promoting consistency between the two Acts.

While the Bill makes many other minor amendments to both the Securities Act and other business-based statutes, these amendments represent the most important changes for issuers and investors to the offer, subscription and allotment of securities.

 

 

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