Welcome to Issue No. 16 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.
| Regulatory developments | Top |
Bill for new statutory financial reporting framework introduced
In July, the Government introduced the Financial Reporting Bill which will repeal and replace the Financial Reporting Act 1993 and amend a number of other statutes which contain financial reporting obligations for various entities.
The introduction of the Bill is the latest stage in the review of New Zealand’s financial reporting framework which commenced in 2009. The aim of the review was to consolidate and confirm which classes of entity should be subject to general purpose financial reporting obligations and what those obligations should be for each class. The Cabinet policy decisions on the review (which form the basis of this Bill) were released last year. Click here for further background details.
A key focus of the Bill is to reduce the compliance burden on small to medium-sized companies. Changes are being introduced for these companies to remove the existing mandatory requirements to prepare general-purpose financial statements and annual reports.
The financial reporting requirements for issuers will be largely unchanged, but will be incorporated into the Financial Markets Conduct Bill under a Supplementary Order Paper (SOP) which was introduced with the Financial Reporting Bill.
We will provide a detailed overview of the impact of the Bill on New Zealand companies, overseas companies and issuers in a future client update.
There are also a number of notable changes introduced by the Bill for other reporting entities. These include:
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Limited partnerships: the Bill removes the requirement on small and medium-sized limited partnerships to prepare general-purpose financial statements;
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Partnerships: the Bill introduces requirements for large partnerships to prepare general-purpose financial statements. These must be audited by a qualified auditor in accordance with auditing and assurance standards (unless the partnership opts out); and
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Charities: the Bill empowers the External Reporting Board to make financial reporting standards for registered charities and other not-for-profit entities that have reporting obligations.
We expect submissions will be called for on the Bill during the select committee stage, but the Bill is still awaiting its first reading. We will keep you updated with further developments.
New guidelines released for the AML/CFT regime
In July, three new guidelines were released by the AML/CFT supervisors to assist reporting entities prepare for their compliance obligations under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 when it comes into force next year. The guidelines are the:
- Designated Business Group – Formation Guideline which is designed to help reporting entities forming a designated business group (DBG) understand the process for doing so. In particular, the guideline highlights the eligibility criteria and election process, and explains the process for notifying an AML/CFT supervisor of the formation of a DBG, any addition or withdrawal of a member, or any change in details.
- Designated Business Group – Scope Guideline which is designed to assist reporting entities to understand which obligations may be shared by members of a DGB.
- Countries Assessment Guideline which is designed to help reporting entities dealing with a customer or institution resident or supervised in or from a foreign country decide whether they need to undertake an assessment of aspects of that country’s regulatory environment, and how to go about doing such an assessment.
| In the courts | Top |
Crafar farms acquisition provides further guidance on the overseas investment regime’s ‘investor test’
A recent Court of Appeal decision (Tiroa E & Te Hape B Trusts v CE Land Information New Zealand 2012 [NZCA] 355) provides overseas investors with further clarity on one of the four core criteria which make up the ‘investor test’ under New Zealand’s overseas investment regime.
Background
The case arose out of an earlier High Court decision and subsequent Ministerial decision to accept the Overseas Investment Office’s recommendation to grant an overseas applicant (Milk NZ) consent to acquire 16 dairy farms and associated assets owned by one corporate group (the Crafar farms). For more detailed discussion on these decisions, see Bell Gully's article: The Crafar farms sale: Are there new hurdles for overseas investors in "sensitive land"?
In the High Court, members of a consortium interested in purchasing the Crafar farms (the appellants in this case) were successful in a judicial review application of the initial Ministerial decision approving the sale of the Crafar farms to Milk NZ on the ground that the Overseas Investment Office (OIO) and the Ministers had applied the incorrect counterfactual when assessing the benefit to New Zealand of the investment. The appellants had also argued that the Ministers made an error of law by failing to correctly apply the “business experience and acumen” test in section 16(1)(a) of the Overseas Investment Act 2005 (the Act), but this ground for judicial review was rejected by the High Court.
Section 16(1)(a) along with sections 16(1)(b) (financial commitment), 16(1)(c) (good character) and 16(1)(d) (immigration eligibility), make up the four core investor criteria, collectively known as the ‘investor test’ for investments in sensitive land. The investor test focuses on the personal qualities of the overseas investor or, if the overseas investor is not an individual, all the individuals with control of the overseas investor. Accordingly, in this case, it was the controlling individuals of Milk NZ (namely the directors of Milk NZ’s parent company, the China-based Shanghai Pengxin Group Co Ltd) who were required to have “business experience and acumen relevant to [the proposed] investment”.
The appeals
This case concerned both the appellants’ appeal of the High Court’s finding that the business experience and acumen requirement was satisfied, as well as the appellants’ application for judicial review of the Ministers’ second consent decision which raised the same point.
The appellants argued that there were four overlapping errors in the approach adopted by the OIO and the Ministers in reaching a decision on the section 16(1)(a) requirement. In particular, they were wrong to rely on:
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the generic investment experience of the controlling individuals, as that experience was unrelated to dairy farming or the dairy industry; and
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the experience and acumen of Landcorp (a professional farm management company) under its contractual arrangements with Milk NZ, because under the Act it was the controlling individuals who had to have the relevant business experience and acumen.
They also argued that the OIO and the Ministers should not have taken into account the agribusiness experience that the controlling individuals were said to have gained through the activities of companies related to Milk NZ (as this overlooked the distinction made in section 16(1)(a) between the corporate applicant and the controlling individuals), and that the Ministers made their decision based on insufficient information.
The Court of Appeal’s view of the "business experience and acumen" criterion
The Court of Appeal upheld the High Court’s decision on the “business experience and acumen” test and rejected the appellant’s judicial review application.
The Court of Appeal agreed with the High Court that the business experience and acumen criterion in section 16(1)(a) was a “broadly worded statutory provision” and allows Ministers “considerable flexibility in determining what business experience and acumen is relevant to any particular proposed investment”, noting that the “assessment the Ministers must make in respect of any particular application is ultimately a pragmatic one”. In the court’s view there is nothing in the language of section 16(1)(a), taken in context, to indicate that Parliament had in mind that an investor must have any particular combination of the requisite skills and experience. As long as the investor “has some business experience and acumen that can reasonably be said to be relevant to the investment’s success, section 16(1)(a) will be met”. The court considered that this will be so even where the investor has to supplement its experience and acumen by utilising the experience and acumen of others to ensure the investment succeeds.
In this case, the court considered that a range of skills, experience and acumen would be required in order for the investment in the Crafar farms to succeed. These ranged from skills and experience relating to the day-to-day operation and management of multiple dairy farms, to those involved in funding and managing a large investment in a substantial business enterprise.
The court agreed that the generic investment experience of Milk NZ’s controlling individuals was relevant to the investment because they had experience and acumen in undertaking and managing large investments in ongoing business enterprises, albeit principally in commercial property development. Further, although they had no experience in dairy farming, they ensured that Milk NZ entered into arrangements with others (such as Landcorp) to access industry-specific experience.
The court did not consider it relevant that the Ministers had taken into account the agribusiness experience of related companies within the overall Milk NZ group (or that they had insufficient information on this aspect) as they did not view the presence or absence of that experience as decisive to the Ministers’ decision. However, for completeness, the court noted that given that section 16(1)(a) requires the OIO and the Ministers to look behind the corporate structure and consider the business experience and acumen of the controlling individuals, if those individuals are also in control of companies conducting agribusiness enterprises in other jurisdictions and gain agribusiness experience as a result, then it would be inconsistent with the approach of section 16(1)(a) to exclude that experience simply because the activity is carried out through corporations.
The court was, however, critical of the Minister for assuming that other agribusiness investments of the Milk NZ group had been successful without making any inquiries to check whether they were. Although this did not invalidate the decision, the court said that it would have been a simple matter to have made further inquiries and that this should have been done.
Comment
In this decision the Court of Appeal made general comments on the degree of Ministerial discretion and “inherent flexibility” which in their view have been built into New Zealand’s overseas investment regime. The court emphasised that although they had reached the conclusion that section 16(1)(a) gave Ministers considerable flexibility in determining what business experience and acumen is relevant to any particular proposed investment on the basis of the provision’s wording, support for this conclusion was also found in other aspects of the Act. This included the responsible Minister’s power under section 34 of the Act to give directions to the OIO concerning (among other things) “the Government’s general policy approach to overseas investment in sensitive New Zealand assets, including the relative importance of different criteria or factors in relation to particular assets”.
| Regulatory developments | Top |
Companies Act updated for the electronic age
The Companies Amendment Act (No.2) 2012 (formerly part of the Regulatory Reform Bill 2010) came into force on 31 August.
The Act amends the Companies Act 1993 by introducing further provisions to bring company law up-to-date with the electronic age. These include:
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An "Opt-in" for receiving communications electronically: allowing shareholders and creditors to elect to receive company documents electronically. This method can be used either in respect of a particular document or for all future communications.
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Electronic meetings and voting: allowing for shareholder participation in meetings by way of audio, audio and visual, or electronic means at the discretion of the board. This includes direct electronic voting during a meeting held via a webcast, whereby shareholders can vote by indicating a preference on a website.
Other changes have also been introduced to either reduce the compliance burden on companies or improve the workability of certain aspects of the regime. These include:
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Proxy appointments by common bare trust nominees: clarifying that a shareholder may appoint more than one proxy for a particular meeting, provided that more than one proxy is not appointed to exercise the rights attached to a particular share held by the shareholder. This allows nominee shareholders (such as New Zealand Central Securities Depository Limited) to appoint different persons as a proxy to vote at a meeting in relation to distinct shares held by the underlying beneficial owner.
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Removal of the share buy-back notice requirement for listed companies: removing the requirement for a listed company that is acquiring its own shares on-market to send each shareholder a notice containing prescribed particulars of the buy-back. This change avoids the duplication with the same requirement in the NZX listing rules
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Reduction of costs for the minority buy-out regime: removing the requirement for an arbitrator to set an interest rate where a company is buying out a minority shareholder and the buy-out has not been the subject of arbitration.
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Improved notification requirements for the voluntary administration regime: requiring the deed administrator to notify the Registrar of Companies when a deed of company arrangement is terminated regardless of whether the deed was terminated by creditors, by a court or if it comes to an end in accordance with its terms. This ensures that creditors and others dealing with a company in voluntary administration are aware of whether or not a company is operating under the terms of a deed of company arrangement.
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Further exceptions for insolvent transactions that can be made void: amending the voidable provisions under the Act to include exemptions for the receiver's liability for rent and payments under such agreements. This removes current uncertainties over the status of payments made by receivers under pre-receivership leases and hiring agreements.
Submissions called for on Companies and Limited Partnerships Amendment Bill
The Commerce Select Committee is currently considering submissions on the Companies and Limited Partnerships Amendment Bill. The Bill incorporates a number of proposed reforms which have been on the Government's agenda for some time, including:
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criminalising the breach of certain directors' duties;
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prohibiting companies which are subject to the Takeovers Code from undertaking long-form amalgamations under Part 13 of the Companies Act and various changes to better align the court process for schemes of arrangements or amalgamations under Part 15 of that Act with the Takeovers Code requirements; and
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tightening requirements around company registration, including a proposal to require all New Zealand registered companies to have a resident agent if they do not have a director who lives in either New Zealand or an "enforcement country".
Submissions closed on 6 September 2012 and the Commerce Select Committee is due to report back on the Bill by 24 January 2013. We expect the Bill to be brought into force by mid-2013. We will keep you updated with further developments.
Further information on this Bill is available in our earlier client update: Submissions called for on legislation to criminalise breaches of directors’ duties and to better align schemes process with Takeovers Code requirements.
| In the courts | Top |
Best practice lessons for general counsel and company secretaries
In a decision that sparked widespread concern in Australia, the High Court of Australia has ruled that James Hardie's general counsel and company secretary owed the company a duty of care under the Australian Corporations Act: Shafron v Australian Securities and Investments Commission [2012] HCA 18. Although the court’s findings are framed within the confines of the Australian Corporations Act, some of the issues canvassed in the decision are of broad interest and offer some best practice guidelines for New Zealand general counsel and company secretaries. For a discussion on the implications of this decision on this side of the Tasman see our earlier client update: The James Hardie decision: liability for general counsel and company secretaries.
| Regulatory developments | Top |
'Code company' definition redefined
The Takeovers Amendment Act 2012 (formerly part of the omnibus Regulatory Reform Bill 2010) came into force on 31 August 2012.
Changes to the definition of "code company"
The Act repeals and replaces the definition of “code company” in the Takeovers Act (with consequential amendments to the Takeovers Code) to:
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Transactions started under the Takeovers Code must be completed under the Code: make it clear that a company continues as a code company even if it ceases to have 50 or more shareholders in the course of a Code regulated transaction or event. This will ensure that a dominant owner (that is, a company which acquires 90% of the shares of a code company) will be able to utilise the compulsory acquisition provisions to acquire the remaining shares in the company. The change will also ensure that the Takeovers Panel does not lose its powers to intervene in and supervise the completion of the takeover or compulsory acquisition, if necessary.
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Exclude shareholders who do not hold voting rights: remove non-voting shareholders from being counted as a shareholder within the definition of 'code company'. This removes a number of relatively small companies which are closely held by a few voting shareholders with a number of investors holding non-voting shares from the scope of the regime.
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50 or more share parcels: provide that a code company must have "50 or more shareholders and 50 or more share parcels". Previously the requirement of '50 or more shareholders' made it easy for small, closely held companies (with trustee shareholders or joint shareholders) to inadvertently exceed the 50-shareholder limit and be subject to significant compliance costs. It also made it impractical for many of those companies to carry out rights issues to raise capital from existing shareholders, or to introduce new, large shareholders.
Improvements to decision processes
The Act also amends the Takeovers Act to facilitate more efficient and quicker decision making on the part of the Takeovers Panel by enabling divisions of the Panel to make decisions by way of written resolution signed by all members of the division.
Takeovers Code (Trustees of Family Trusts) Exemption Notice 2012
The Takeovers Panel has granted a new class exemption from rule 6(1) of the Takeovers Code for persons who are or who become trustees of a private family trust as part of a bona fide reorganisation of a private family trust or an event outside the control of the trustees of the trust. Subject to certain conditions, the Takeovers Code (Trustees of Family Trusts) Exemption Notice 2012 is available for persons who increase their voting control in a code company as a result of changes to the trust's trustees (changes to trustees), provided there is no increase in voting control in the code company on behalf of the trust resulting from the changes to trustees.
Takeovers Panel consults on disclosure of equity derivative positions
On 24 August 2012, the Takeovers Panel issued a Consultation Paper entitled Disclosure of Equity Derivative Positions .
The Panel is considering options for recommending law changes to require ongoing disclosure by persons who hold long equity derivative positions in public issuers and to include in the Takeover Code’s disclosure requirements for takeovers disclosures of relevant equity derivative positions. The Panel is concerned that long equity derivative positions of a derivative holder combined with a corresponding hedge position held by the derivative writer in underlying Code company securities may provide an opportunity for undisclosed stake building during the period leading up to a takeover bid.
For Bell Gully commentary on this paper, see our client update: Disclosure of equity derivatives – a solution to a problem that doesn’t exist?
Submissions on the paper close on 5 October 2012.
Takeovers Panel has made recommendations to the Minister of Commerce
Following a series of consultations on a 'low policy content' review of the Takeovers Code over 2009-2011, the Takeovers Panel has released a paper outlining its final recommendations on various technical drafting amendments to the Takeovers Code and a small number of amendments to the Takeovers Act 1993. The paper is available here.
Further consultation
The Panel has indicated that the draft regulations that will give effect to the amendments will be sent to those who submitted on the Panel’s consultation papers to develop the policy of the amendments.
The draft regulations will be available on the Panel’s website: www.takeovers.govt.nz
| Regulatory developments | Top |
Operational improvements for credit unions
The Friendly Societies and Credit Unions Amendment Act 2012 (formerly part of the Regulatory Reform Bill 2010) came into force on 31 August 2012.
The Act removes some of the existing statutory constraints on credit unions, giving credit unions greater flexibility to issue securities, accept deposits, borrow and make loans to members. Limits on such activities will be set by a credit union’s rules and trust deed, rather than by statute.
The changes introduced by the Act to the Friendly Societies and Credit Unions Act 1982 include:
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Increased maximum limit on member’s shareholding: The removal of the $250,000 limit on the value of shares each member may hold in a credit union;
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Ability to issue securities other than shares in a credit union: A new section to allow a credit union to issue securities other than shares (if authorised by and in accordance with its rules and trust deed). These credit union securities are transferable only between members and will not confer voting rights;
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Removal of general prohibition on taking deposits: The removal of the prohibition on credit unions from accepting deposits from any person other than for subscription of its shares;
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Restrictions on power of credit union to borrow money removed: The removal of restrictions to allow a credit union to borrow money if the borrowing is authorised by, and in accordance with, its rules and trust deed. Previously, a credit union could only borrow from a narrow range of lenders and only on a short term basis;
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Removal of limits on amounts and terms of loans to members: A new section which allows a credit union to make loans to members for such purposes and upon such security (or without security) and conditions as the rules of the credit union may provide, either generally or specifically; and
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Credit union may hold land as permitted by its rules and trust deed: The removal of restrictions on credit unions (in the names of their trustees) holding land and buildings. Instead, a credit union has the power to hold any interest in land if authorised by and in accordance with its rules and trust deed.
Now that credit unions are subject to the new prudential requirements for deposit takers under the Reserve Bank of New Zealand Act 1989, the Act has also removed some provisions which are no longer necessary. These include the oversight of the Registrar of Friendly Societies and Credit Unions in respect of the monitoring of surplus investments (section 114), the security provided by an officer of a credit union (section 117), and guarantees of funds by credit unions (section 134).
The obligation on credit unions to maintain general reserves has also been repealed. This provision was made redundant by the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 which came into force in December 2010.
Managers of unit trusts can send accounts electronically
The Unit Trusts Amendment Act 2012 (formerly part of the Regulatory Reform Bill 2010) came into force on 31 August 2012.
The Act modernises the means of conveying information to unit holders under the Unit Trusts Act 1960 by enabling accounts and financial statements to be distributed electronically to unit holders.
Under the new provisions, the manager of the unit trust is required to send a notice explaining to unit holders that they may choose to receive the audited statement of accounts or the financial statements as a printed copy or by electronic means in a similar manner to the section 209 notice introduced under the Companies Act in respect of annual reports.
| Financial Markets Authority (FMA) | Top |
FMA proposes overhaul of rules around property proportionate ownership schemes
Further to FMA's July update on the review of 44 class exemptions, FMA has announced its proposal to overhaul the Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002.
The notice provides exemptions from the statutory supervisor, investment statement, prospectus, accounting, register and certificate requirements for offers to the public of interests in real property proportionate ownership schemes on the basis of provision of an alternative offer document and alternative requirements around the offer and allotment processes.
Although most submissions supported retention of this notice, FMA has concluded that this is not justified in terms of the purpose of the Securities Act. Instead, FMA is proposing a new limited exemption to address two discrete issues applying in the case of proportionate ownership schemes relating to developments on real property:
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an exemption allowing extension of the prospectus for allotment of interests in schemes. This is because often development timeframes will be expected to exceed 18 months; and
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an exemption that takes account of the fact that where there is a long period of time between subscription and allotment, market movements, and other events, may mean that the prospectus is no longer up to date at the time of allotment.
FMA is seeking comments on these discrete exemptions by 24 September 2012, and aims to have any new exemptions determined appropriate in place by 31 December 2012.
A copy of the project update and consultation paper on the proposed exemptions is available here.
Transitional arrangements
The Securities Act (Real Property Proportionate Ownership Schemes) Exemption Notice 2002 expires on 30 September and FMA does not propose to grant further similar exemptions. However, under a transitional provision (which is expected to be in force before the existing notice expires) offers that have commenced before 30 September 2012 will be able to be completed in reliance on the existing notice. This would enable the continued offer of any existing scheme (namely a scheme with an Offeror’s Statement dated on or prior to 30 September 2012) until 30 November 2012.
Any offer commencing after 30 September 2012 would be required to be offered in full compliance with the Securities Act and Regulations. For this reason FMA is inviting any market participant currently proposing to offer a real property proportionate ownership scheme to the public that will not have commenced before this date to contact FMA to discuss whether specific exemptions may be justified in the particular case.
FMA releases its final guidance note on the disclosure of non-GAAP financial information
FMA has released its final guidance note on the disclosure of non-GAAP financial information (or, information which is not presented in accordance with generally accepted accounting practice (GAAP) or is presented as an alternative to the statutory profit).
The guidance note is intended for issuers, their directors and preparers of financial information. It sets out FMA’s expectations on the use of non-GAAP financial information in corporate documents, such as transaction documents and market communications.
Following consultation on a draft version of the guidance note in May this year, FMA has:
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added and removed paragraphs to clarify the definition of non-GAAP profit information and when the guidance applies;
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clarified that GAAP does not necessarily apply to information presented outside financial statements, but that it is reasonable for users of financial information to expect that information to be presented in accordance with GAAP;
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clarified as to what the guidance considers unbiased presentation; and
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added an illustrative profit announcement that complies with the guidance note.
Further details of FMA’s responses to submissions it received on the draft guidance note are available here.
FMA will assess non-GAAP financial information disclosures against this guidance from 1 January 2013.
FMA releases its first market conduct report
FMA has released its first report (Inquiries Investigations and Enforcement Report 2012) on the key issues and themes that have emerged through FMA’s inquiries, investigations and enforcement activities over the last 12 months.
The report highlights FMA’s engagement with and oversight of the market on a wide range of matters including:
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Failed finance company investigations;
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Asset preservation orders (regarding the Hanover Group of companies);
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Perimeter surveillance;
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Financial advisers;
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Offer of securities without prospectus;
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Unsolicited offers;
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Secondary markets issues (including delayed filing of substantial shareholder notices, which will be an area of focus for FMA in 2012-2013); and
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Third party claims.
Finance company litigation
The report also provides commentary on some of the specific themes and issues arising from FMA’s recent finance company prosecutions: R v Moses and Ors (Nathans); R v Graham and Ors (Lombard); R v Petricevic and Ors (Bridgecorp). FMA notes that these cases "have sent a clear message to the issuing corporate community that the law imposes on them clear responsibilities to ensure the accuracy and adequacy of their disclosure documents". In particular, FMA notes that these cases illustrate that:
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more is required of directors than mere honesty. A director cannot form a reasonably held belief, if they do not know enough to form a proper view on whether or not the documents contain untrue statements;
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directors are expected to have an understanding of the fundamentals of the business and of financial reporting (and the level of financial literacy required of a director of a finance company is arguably likely to be higher);
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disclosure obligations are assessed by an overall impression conveyed by offer documents not a painstaking analysis of individual statements;
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directors must review the statements in disclosure documents from the point of view of a prudent but non-expert person, setting aside their own insider knowledge; and
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the obligation not to make misleading or untrue statements in offer documents is not a delegable duty.
| In the courts | Top |
Supreme Court reverses previous thinking on the Blue Chip property investment schemes
The Supreme Court has issued a significant decision on the scope of investment products which fall within the Securities Act 1978 (reversing the findings of the High Court and Court of Appeal).
The case, Hickman and Ors v Turner and Waverley Limited & Ors [2012] NZSC 72, involved the Blue Chip group of companies which promoted property investment schemes to the public before collapsing in 2008. The various schemes differed in detail, but all required the investors to commit to the purchase of apartments "off the plan" (as short-term investors with returns by way of fees) in one or more developments under sale and purchase agreements (SPAs) with Blue Chip associated property developers. The schemes involved Blue Chip providing funding assistance for the purchases as well as Blue Chip locating a second purchaser for each apartment, enabling the original investor to be bought out. However, after the Blue Chip group collapsed, the developments (by separate companies) went ahead and the investors faced difficulties in raising the necessary funds to complete the purchases. The investors argued that they were entitled to the return of their money because the offer of the schemes without a registered prospectus contravened the Securities Act and the SPAs were invalid and of no effect.
The Court of Appeal had held that the SPAs were independent of the Blue Chip investment arrangements and were exempt from the requirements of the Securities Act because they were agreements for sale and purchase of land (within the section 5(1)(b) exemption of the Act). This meant that the investors were still bound by their SPAs to purchase the apartments, without the benefit of the financial arrangements promised by Blue Chip under the investment schemes.
However, the Supreme Court took a different view. It held that Blue Chip's various products constituted "securities" and that Blue Chip had breached the Securities Act by offering those products without a prospectus. Because the SPAs were part of the same broad arrangement, they too were void (having also been offered without a prospectus).
The effect of the Supreme Court's decision is that the SPAs entered into by the Blue Chip investors are unenforceable under section 37 of the Securities Act. This relieves the investors from ongoing financial commitments and leaves them free to seek redress for losses suffered as a result of the developers' enforcement of those SPAs. More broadly, the case has given new guidance about what constitutes a "security", and therefore when the requirements of the Securities Act (such as issuing a prospectus) might apply.
For detailed commentary on this case see our earlier client update: 'What is a "security" and when does a sale of land require a prospectus? The Supreme Court reverses previous thinking'
Interestingly, in order to prevent a repeat 'Blue Chip' type property scheme from potentially falling outside the scope of New Zealand's securities regime, under the Financial Markets Conduct Bill the FMA is to be given a "call-in" power for products which do not neatly fall within the new defined product categories in the Bill.
| Regulatory developments | Top |
Submissions called on Commerce (Cartels and Other Matters) Amendment Bill
The Commerce Select Committee has called for submissions on the Commerce (Cartels and Other Matters) Amendment Bill. The Bill introduces criminal sanctions for hard-core cartel behaviour and makes a number of other amendments to the Commerce Act (including to the provisions that govern jurisdiction and penalties).
Submissions closed on 6 September.
For further commentary on the criminalisation provisions for cartel conduct contained in this Bill refer to our earlier client update: Set up the training room: prison for cartel conduct on the way.
| New Zealand Commerce Commission (NZCC) | Top |
Media releases
The NZCC has issued the following media releases:
Industry regulation and regulatory control
NZCC releases report on dry run review of Fonterra’s farm gate milk price
The NZCC undertook a non-statutory dry run review at the request of the
Minister for Primary Industries to in order to test how the Government’s new
milk price monitoring regime would work in practice.
Click here for more
Mergers and acquisitions
Fonterra applies to acquire New Zealand Dairies
The NZCC has received an application from Fonterra Co-operative Group Limited
seeking clearance to acquire the dairy processing assets of New Zealand Dairies
Limited (NZDL). NZDL owns a milk powder processing plant in Studholme,
near Waimate, and until recently has been collecting raw milk from farmers in
the South Canterbury and North Otago regions.
Click here for more
The NZCC has since released a statement of preliminary issues.
Click here for more
Vodafone New Zealand seeks clearance to acquire TelstraClear
The NZCC has received an application from Vodafone New Zealand Limited seeking
clearance to acquire TelstraClear Limited. Vodafone is a mobile phone operator
in New Zealand and has a nationwide network servicing its mobile retail
customers, as well as wholesaling mobile services to other providers.
TelstraClear offers a range of predominantly fixed line services to residential
and business customers throughout New Zealand.
Click here for more
The NZCC has since released a statement of preliminary issues.
Click here for more
Market behaviour
Court of Appeal clears the way for trans-Tasman cartel case
The Court of Appeal has issued a ruling widening the NZCC's claims against
Australian packaging company Visy Board Pty Ltd, for its part in an alleged
cardboard packaging price-fixing cartel. The NZCC's case claims that Visy Board
and its competitor Amcor Ltd formed an illegal arrangement to divide
trans-Tasman corrugated fibreboard packaging markets between them, and to fix
packaging prices for New Zealand.
Click here for more
Two more airlines settle with NZCC in air cargo case
The High Court has ordered Korean Air Lines Co. Limited and Emirates to pay
penalties of $3.5 million and $1.5 million respectively for breaches of the
Commerce Act. Korean Air has admitted liability in the NZCC’s air cargo price
fixing case for agreeing fuel and security surcharges in Hong Kong, Japan and
Malaysia for cargo flown to New Zealand. Emirates admitted liability for
agreeing fuel and security surcharges in Indonesia for cargo flown to New
Zealand.
Click here for more
Telecommunications
NZCC identifies 29 companies potentially liable for telco development levy
The NZCC released its final notification of the companies potentially liable
for the $50 million Telecommunications Development Levy for the 2011/12 year.
The levy will fund telecommunications service obligation charges, rural
networks and upgrades to the emergency calling services.
Click here for more
Record $12 million penalty against Telecom stands in ‘data tails’ case
The Court of Appeal has upheld a record $12 million penalty imposed against Telecom
in April 2011 for breaching the Commerce Act, following an unsuccessful appeal
by Telecom. The NZCC had brought penalty proceedings against Telecom for taking
advantage of its market power in breach of section 36 of the Commerce Act.
Click here for more
Consumer issues
NZCC warns Sky TV over possible breach of Fair Trading Act
The NZCC launched a Fair Trading Act investigation of Sky earlier this year
following a complaint from a customer who had wanted to take advantage of a $1
upgrade marketing campaign by Sky Network Television Limited. The investigation
has resulted in Sky receiving a warning from the NZCC for potentially
misleading customers.
Click here for more
| Australian Competition and Consumer Commission (ACCC) | Top |
Selected ACCC media releases
The ACCC has issued the following media releases:
Mergers and acquisitions
ACCC calls for comment on Nestle's proposed acquisition of Pfizer nutrition
The ACCC has released a Statement of Issues on Nestlé’s proposed acquisition of Pfizer Nutrition.
Click here for more
ACCC authorises NBN Co / Optus HFC subscriber agreement
The ACCC has authorised an agreement between NBN Co and SingTel Optus for the migration
of Optus' HFC subscribers to the NBN and the decommissioning of parts of Optus’
HFC network. This decision confirms a draft decision issued by the ACCC in May
2012.
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ACCC not to oppose Australian Leisure and Hospitality’s proposed acquisition of the Caringbah Hotel
The ACCC has announced that it does not propose to intervene in the proposed
acquisition by Australian Leisure and Hospitality Group and the Laundy Hotel
Group of the Caringbah Hotel in NSW. Woolworths Limited has a direct 75 per
cent interest in Australian Leisure and Hospitality Group.
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ACCC to not oppose acquisition by APA of HDF subject to divestiture
The ACCC announced that it would not oppose the proposed acquisition by APA
Group of Hastings Diversified Utilities Fund after accepting a court
enforceable undertaking from APA to divest the Moomba to Adelaide Pipeline
System. Both parties are involved in the provision of gas transmission pipeline
services.
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ACCC authorises aviation alliances
The ACCC has issued two determinations granting authorisation to an Affiliation
Agreement between Emirates and Flydubai, and separately, to a Commercial
Alliance between Etihad and Air Berlin. Under the Affiliation Agreement between
Emirates and Flydubai, the airlines will coordinate air passenger and air cargo
services between Australia and Dubai and on 'behind and beyond' services.
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ACCC not to oppose News Corporation's proposed acquisition of Consolidated Media Holdings Limited
The ACCC announced that it would not oppose the proposed acquisition by News
Corporation of 100 per cent of the shares in Consolidated Media Holdings
Limited (CMH). CMH has a 50 per cent shareholding in FOX SPORTS Australia,
which owns 50 per cent of the shares in FOXTEL.
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Market behaviour
ACCC court action alleges Sydney forklift gas supply cartel
The ACCC has instituted proceedings in the Federal Court in Sydney against
Renegade Gas Pty Ltd and Speed-E-Gas (NSW) Pty Ltd. The ACCC alleges that these
companies, through their senior executives and sales staff, gave effect to an
anti-competitive cartel arrangement which included not supplying liquid
petroleum gas cylinders for forklifts to each others' customers.
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Consumer issues
Court finds Zamel's misled consumers
The Federal Court has found that The Jewellery Group Pty Ltd, the company which
operates the Zamel's chain of jewellery stores, misled consumers about the
savings to be made during sales. By using statements such as "$99
$49.50" or "Was $275 Now $149", Zamel's represented to
consumers who were unaware that they could obtain discounts outside Zamel’s
sales periods that they would save an amount being the difference between the
higher and lower price if the items were purchased during the sale when that
was not the case.
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ACCC accepts undertaking from refrigeration contractor for misleading carbon price claims
The undertaking relates to statements made by Equipserve Solutions in an email
to its customers which attributed the entire amount of an increase in the price
of a refrigerant gas to the carbon price when that was not the case.
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Metricon Homes Qld to pay $800,000 penalty for misleading representations
The Federal Court in Brisbane has ordered Metricon Homes Qld Pty Ltd to pay
$800,000 in penalties and $50,000 towards the ACCC's costs after it agreed that
some of its advertising and promotional material was false or misleading.
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| Regulatory developments | Top |
Select committee calls for submissions on ETS amendments
The Climate Change Response (Emissions Trading and Other Matters) Amendment Bill is now before the Finance and Expenditure Select Committee and public submissions are being invited on the Bill. The closing date for submissions is 10 September 2012.
The Bill amends the Climate Change Response Act 2002 to introduce the changes the Government announced in July for the New Zealand Emissions Trading Scheme (ETS). The purpose of the changes is to maintain the costs that the ETS places on the economy at current levels. The changes also make a number of amendments to improve the operation of the ETS, particularly for forest landowners.
For details of these changes see the previous issue of Corporate Reporter here or visit the Ministry for the Environment’s climate change information website here.
| Electricity Authority developments | Top |
Electricity Authority release preliminary review of net pivotal generation
The Electricity Authority (the Authority) has recently released a review of locally net pivotal generation events (the report). The review was conducted in response to two scheduled transmission outages in February and April which resulted in very high wholesale electricity prices.
The report is intended to form part of a more detailed project by the Authority (announced in May 2012) to investigate options for ensuring efficient pricing occurs in circumstances where a generator is net pivotal.
A locally net pivotal situation occurs when:
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a generator’s generation is required to satisfy demand in a particular region; and
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the level of that generation is greater than the generator’s own retail and hedge commitments (so other energy market participants must purchase from the net pivotal generator in order to satisfy their own retail/usage requirements).
Typically these situations occur when a region is isolated or transmission-constrained (for example, when a transmission outage prevents or restricts external generation from being provided to a particular geographical area).
The Authority considers that, in certain circumstances, the high wholesale electricity prices set by net pivotal generators are inefficient and therefore not in the best interests of the electricity market as a whole. Whilst the Authority acknowledges that high market prices that are caused by genuine supply shortages may be efficient, experience dictates that high prices in net pivotal situations will often be inefficient. This is because the high prices charged by a net pivotal generator often do not result from a genuine supply shortage but rather from the generator’s ability to charge high prices in the absence of a competitive constraint.
The Authority has proposed a number of possible options for mitigating the ‘inefficient’ price effects of net pivotal scenarios. The following remedies have been proposed by the Authority in situations of local net pivotal generation:
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Net pivotal declarations. This proposal involves either the Authority or the generator declaring in advance that a net pivotal situation will occur over a defined period of time. Restrictions would then be imposed on the net pivotal generator’s ability to increase prices over the period during which they are net pivotal. These restrictions would limit the generator’s ability to offer generation at higher prices than would be possible under normal operating conditions and could take the form of either universally defined maximum offer prices for additional generation, or maximum offer prices for additional generation set at the generator’s long run marginal cost of production.
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Price or offer by fiat. This proposal would see the Authority set fixed market prices in situations where a generator is net pivotal. This price would be set by the Authority either prior to a net pivotal situation occurring, or after the event. The set price could be calculated with reference to either a reference spot price for the period, the average price over the previous week or the long run marginal cost of the particular generator.
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Branch buffer. This proposal involves imposing a set 'branch buffer' price (the EA suggests $200/MWh) at which the physical transmission limit of a branch can be hypothetically exceeded during scheduling (the Branch Buffer Price). This means that in the case of any marginal offer price over the Branch Buffer Price, the physical constraint will be exceeded during scheduling and prices for the branch will therefore not exceed the Branch Buffer Price. The physical transmission constraints would be used to determine dispatch, and as such constrained-on payments would increase, as Transpower compensates the high cost (but non-transmission constrained) generator for the generation it provides above the level that was predicted in scheduling.
An example of this in action would be the case of a low cost generator (A) who offers sufficient generation to power an entire branch at a marginal price of $100/MWh, but due to transmission constraints is prevented from supplying users at the other end of the branch. As a result of the transmission constraint, users at the other end of the branch are supplied by a high cost generator (B) whose marginal offer price is $500/MWh. By imposing a Branch Buffer Price of $200/MWh, the scheduled generation would be entirely supplied by A at a price of $200/MWh. By contrast in the absence of a branch buffer some users on the branch would be charged $100/MWh and others who would be charged $500/MWh. The branch buffer therefore reduces the locational price separation that can otherwise occur in the presence of a transmission constraint.
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Contract grid. This proposal involves basing final pricing on an expected grid rather than the actual available physical grid. The physical grid would still be used to determine dispatch. In circumstances where the final price (as calculated based on the expected grid) received by a generator is lower than the dispatched price (as calculated based on the wholesale spot price), the shortfall is paid to the generator in the form of a constrained-on payment. The cost of constrained-on payments would be borne by load customers or Transpower. This proposal has the effect of spreading the burden of high spot prices in a transmission constrained geographical area across all electricity users. Given that most instances of net pivotal generation result from transmission constraints, this proposal appears equitable in the sense that it spreads the cost of these constraints across all transmission users (rather than simply burdening those in the area in which a net pivotal generation event occurs).
The review has not been met with approval from all market participants, with Genesis Energy challenging the Authority’s approach to defining and remedying net pivotal situations. In a submission on the draft report, Genesis Energy argues that in the long run the effect of net pivotal generation events is not sufficiently material to result in market inefficiencies. This is broadly consistent with the view taken by the Australian electricity regulator (AEMC) in their review of transient market power exercised by Australian generators, and cited by Genesis in support of their position.
Genesis also argues that, to the extent action is required to prevent an undesirable net pivotal scenario, this should be directed at remedying transmission constraints, rather than regulating generator behaviour. Specifically, Genesis views it as important that market impacts are given more consideration in the planning and operation of transmission services.
The Authority is expected to release a more developed paper on options for dealing with net pivotal generation in the coming months, but the proposals set out above are expected to provide a foundation for these recommendations.
The market performance report is available at: http://www.ea.govt.nz/industry/monitoring/enquiries-reviews-investigations/2012/
NEED MORE INFORMATION?
| Contact us | Top |
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.
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