Legal

Legal compliance is fundamental to governance best practice. A board adds value by ensuring the probity of financial reports and processes and a high standard of compliance with regulatory environments. Ensuring proper adherence to the law is part of being an effective director, and liability is imposed on directors under various acts. The legal framework for a director depends on the sector that a business or an organisation operates in. For example, laws and requirements affecting a not-for-profit will differ from those for a registered company or an SOE.

Alongside the legislative duties placed on directors and boards, some entities also have certain regulatory obligations (for example in financial reporting or compliance with listing rules). This section contains information pertaining to both of these important areas of compliance.

Legislation

Chapman Tripp provides guidance and updates for directors on key legislative developments and cases.

New Zealand acts, bills and legislative instruments are available from New Zealand Legislation. In addition to the following key acts, directors also need to be aware of any industry specific legislation:

IoD submissions on legal, regulatory and compliance issues relevant to directors and boards are available here

Recent developments

Health and safety: We discuss the forthcoming changes to the Health and Safety in Employment Act in a separate section of the website, here. Check back regularly to note any updates as they are published.

Audit Reporting : Recent changes to the nature of Audit Reporting are covered in the “audit” section, here

Residency requirements for directors: As of May 1 2015, all newly registered companies must have at least one registered director who lives in New Zealand, or is a resident and a director of a company registered in Australia (a designated enforcement country). The same will apply to existing New Zealand Companies from 29 October 2015. For more information, members can access this directorsbrief.

The Companies Amendment Act (No 4) 2014 introduced new criminal offences for directors who knowingly cause their companies serious loss by acting in bad faith towards it or who dishonestly allow an insolvent company to incur debts.

IoD members also have access to the “Companies Act: New offences and requirements for directors” directorsbrief.

The Financial Reporting Act 2013 replaces the Financial Reporting Act 1993 and:

  • defines key concepts, for example, Generally Accepted Accounting Practice (GAAP), financial statements and group financial statements
  • provides the XRB with powers to issue financial reporting standards (XRB Standards).

Members also have access to the “Changes to Financial Reporting Requirements” directorsbrief.

 

The Financial Markets Conduct Act 2013 (FMC Act) came into force in a two stage process, on 1 April 2014 and 1 December 2014.
Impacts vary: for some, there are new licence and governance requirements for particular financial products. However, there are changes that impact every participant, such as new disclosure requirements for offers of financial products.

The key parts of the Act which came into effect on 1 April 2014 include:

  • being able to apply for licenses under the new licensing regime, and
  • The FMA becoming the primary regulator of conduct in relation to financial products and financial services in place of the Commerce Commission.

In December 2014:

  • New disclosure requirements and licensing obligations will begin to take effect, and
  • The new online registers system will be up and running, ensuring information on financial products and managed investment schemes are easily accessible and comparable.

For coverage of the changes see the Chapman Tripp guidance here or visit the Financial Markets Authority website.

Additionally, Chapman Tripp have published a paper arguing that the change to the FMCA creates a fundamental shift in capital raising and in the role of facilitators and gatekeepers, which is available for download here. Alongside this is a chart setting out the basic parameters around director and wider participant liability which is available for download here.

Key organisations and websites

The Companies Office maintains registers for companies, societies, trusts and a range of other types of organisations. It also provides guidance on compliance requirements for companies.

In December November 2013, all companies on the Companies Register were assigned a New Zealand Business Number (NZBN).

The NZ stock exchange (NZX) website contains information on the regulation of NZX markets, participant and listed issuers, and the NZX Listing Rules, which are available here.

The Financial Markets Authority has the responsibility for regulating capital markets and financial services in New Zealand. Their main vision is to promote and facilitate the development of fair, efficient and transparent financial markets. The FMA website houses a range of resources and information relating to their role as New Zealand’s financial market regulator.

The most recent iteration of the NZX Listing Rules is available here.

The Law Commission promotes the systematic review, reform and development of laws. Current reviews of interest include:


The Takeovers Panel was established under the Takeovers Act 1993 and established a Takeovers Code in 2000. The role of the Panel and of the Code is to ensure that all shareholders have a fair opportunity to participate in control-change transactions in Code companies (such as takeovers and allotments or acquisitions of parcels of shares). Takeovers information for directors can be found here.

Director duties and liabilities

Section 131 of the Companies Act 1993 states that the central duty of a director is to act in good faith and in the best interests of the company.

A Director’s Guide (2013), a joint publication by the IoD and FMA, sets out the essentials of being an effective director, including questions to ask before taking up a directorship, decision making, and legal requirements for signing off financial statements.

IoD Practice Notes 1 and 4 (2011 and 2013) discuss key Australian and New Zealand cases and lessons for directors, including that directors need to understand their legally defined duties and responsibilities, the need for financial literacy, that they must not abdicate their responsibilities and that reliance on external advice may not fulfil their responsibilities.

Directors also have significant duties and obligations in relation to health and safety in the workplace.

The Financial Markets Authority outlines 9 principles of effective and transparent corporate governance in their handbook “Corporate Governance in New Zealand, Principles and Guidelines”. Listed issuers are encouraged to familiarise themselves with the guidelines and show in annual reporting and disclosures how they achieve the principles.

The UK’s Financial Reporting Council also published the principles-based “Corporate Governance Code” and the “Stewardship Code”.

Martin Gelter and Geneviève Helleringer, recently published an article in the University of Illinois Law Review entitled “Lift not the painted veil! To whom are directors’ duties really owed?” It is an academic work discussing the tension between the uniformity of directors’ duties and the heterogeneity of directors themselves. It also explores areas of independence and unconscious bias.

In a June 2014 speech to the Australian Institute of Company Directors (AICD), the Chairman of the Australian Securities and Investments Commission (ASIC) sets out “'What ASIC expects of directors”.

Insurance

Insurance is a critical consideration for a company and its directors and should be viewed as an investment in risk management. Liability is imposed on directors in the Companies and other Acts and by common law.

The Four Pillars of Governance Best Practice chapter on Insurance and indemnities (page 191-202) provides a general outline of insurance matters, including policies such as D& O liability, insurance procedures and the claims process.

Directors and officers (D&O) insurance

D&O insurance covers directors for wrongful acts in relation to their role as company directors in relation to liability for claims made against them and associated legal costs.

The directorsbrief 2015/1 provides an overview of D&O insurance and recent developments.

A Supreme Court decision in 2013 (about Bridgecorp Limited and Steigrad) held that directors are denied access to claim defence costs if there is a third party claim on a policy with a combined limit for liability and defence costs. This means that directors need to ensure the structure of liability policies safeguards defence costs cover, for example by ‘ring-fencing’ defence costs within a liability policy or having a separate policy for defence costs.

The Crown Entities Act 2004 contains a standard regime for immunity, indemnities and insurance. Chapter 19: Liability and protection from legal claims or proceedings, in the State Services Commission guidance for Crown entity boards illustrates what this entails.

This boardroom article from June 2014 explores the relationship between director and officer Liability Insurance and a directors personal assets and interests.

Harvard Law School released an article in 2014, “How much protection do indemnification and D&O Insurance provide?” which explores how advancement of legal fees, indemnification, and insurance operate when officers and directors become involved in regulatory investigations and proceedings.