Major reforms to New Zealand Company Law

The New Zealand Government has announced proposals for the most substantial changes to company law in over 30 years. The reforms cover a variety of areas including some substantive policy reforms (for example in relation to major transactions), clarifications and technical improvements to legislation, and practical matters, such as allowing greater use of digital processes.

New Zealand's proposed reforms reflect global trends to modernise legislation for the digital age, and to increase corporate transparency. See for example, legislative efforts to improve corporate transparency in the UK, US and Canada. These international reforms show a focus on disclosure of beneficial ownership information, which the New Zealand Government has said it will not be progressing as part of this package of reforms.

A new Corporate Governance Amendment Bill to implement the changes is expected to be introduced in early 2025. The bill will go through a select committee process, where it will be possible to make submissions.

Although the devil will be in the detail of the draft bill, getting up to speed on the proposed changes now will prepare you to see how the reforms might, as the government intends, make doing business easier, and to identify any areas that you want to make submissions on. We are here to assist you now, and as the proposals develop into law.

There will also be second phase of reform intended begin with a Law Commission review in 2025, which will look at directors' duties and related liabilities, enforcement and sanctions issues. This work will be welcome in the wake of the Mainzeal case.

 

Changes to major transactions rules

Currently, a company may not enter into a major transaction unless it is approved by, or contingent on, a special resolution of its shareholders (i.e. approval by 75%, or higher if the constitution so requires, of the votes of the shareholders entitled to vote and voting). A major transaction is, currently, an actual or agreed acquisition, disposition or transaction involving assets, rights, interests, obligations or liabilities, in each case the value of which is more than half of the value of the company's assets before the acquisition, disposition or transaction.

It is proposed that the major transactions rules are changed so that it is not possible to avoid them by structuring transactions as a series of smaller transactions which fall below the threshold or by executing a transaction at subsidiary level. The detail of these changes will be important. The Government acknowledged in its Regulatory Impact Statement that details will need to be further developed as the bill is drafted.

A clarification that share issues, buybacks, dividends and redemptions are not included as major transactions is also proposed.

 

Modernisation and simplification changes

A raft of changes is proposed to modernise and simplify companies, and other, legislation. The proposed changes include:

• Introducing a new out-of-court process for reduction of share capital, intended to be modelled on Australian legislation and require a resolution of the board and agreement of shareholders. The aim is to avoid the need to go to court for approval which is currently needed where existing out-of-court options, such as dividends and buybacks, are not used.
• Extending section 107 of the Companies Act 1993, which provides for a simplified process where there is unanimous shareholder consent, to issuing of options for convertible shares, crediting unpaid share capital and acquisition of shares to be held as treasury stock.
• Removing the recently introduced Section 131(5) of the Companies Act 1993 which states that for the avoidance of doubt directors may consider matters other than the maximisation of profit (for example ESG factors) when considering the best interests of the company.
• Allowing unclaimed distributions to be mingled with and used as company funds after a period of two years and reasonable efforts to contact the shareholder. Unclaimed distributions would then no longer sit as a permanent liability on a company's balance sheet, instead the shareholder's claim would be treated as a contingent liability. Some companies already deal with this issue in their constitutions, but this would extend a solution to all New Zealand companies.
• Allowing certain actions which can only be taken if permitted by the constitution to be undertaken by companies without a constitution. Actions such as share buybacks and a company holding its own shares are currently only allowed if permitted by a company's constitution. It is proposed that these actions should be available by default as they are no longer controversial.
• Modernisation of language. The government mentions a general intention to express parts of the legislation in more modern language. While modernisation is to be welcomed, language changes will be one to watch for unintended consequences.
• Simplification of processes considered to be unnecessarily prescriptive, unnecessarily complex or not well aligned with other legislation. Examples include reservation of company names, restoration of companies to the register and disclosure of interest and share dealing by directors.

 

Insolvency law changes

Insolvency law changes are also proposed. These include:

• An extension of the claw back period for voidable transactions with related parties to four years from the current two.
• Introducing a power to levy companies to meet the Official Assignee's costs of winding up companies where there are insufficient assets in the estate to do so.

There are also proposals to introduce unique identifiers for directors and general partners to improve the ability to identify them, to help combat harmful practices, including phoenixing. Introduction of the identifiers would also allow directors' and shareholders' home addresses to be kept private. An address for service would need to be provided instead.

 

Digitalisation

The Companies Act 1993 pre-dates the digital age in which we now live. The government proposes to make changes to allow greater use of digital processes, including:

• allowing companies and liquidators to put certain information (for example AGM information and annual reports) for shareholders and creditors on a webpage and share a link with them rather than sending copies to each person.
• updating references to physical storage locations to allow for use of technology such as cloud computing.
• allowing more processes to be completed digitally, including, for example, removing some requirements for signature, changing required modes of delivery for documents, and changing procedures for meetings so that electronic communications and modern technology can be used.

 

Changes to encourage use of New Zealand Business Number (NZBN)

NZBNs are intended to make business interactions faster and easier by enabling information contained on the NZBN register (for example legal and trading names and addresses and owner/director names) to be prepopulated reducing the time businesses need to spend completing forms.

Various changes are proposed which are intended to increase the uptake of NZBNs, including simplifying the process for government agencies to require an NZBN as a condition of service.

 

Preparing for the changes

For now, without the detail the bill will bring, the best preparatory steps will be to understand the proposed areas of change and consider how they might affect your business. When the bill arrives, expected to be early next year, it will be possible to start more detailed planning around how the proposed changes might affect you and to make submissions on any areas of concern in the bill.

For further guidance or support in navigating these reforms in New Zealand, now or at any stage of the legislative process please contact our DLA Piper Corporate Team.