Approval is needed where an “overseas person” acquires sensitive New Zealand assets. This article describes the key points about the process to be aware of in advance.

From our experience in obtaining OIO approval we have drawn together the following points which answer the key questions an investor has about the process and steps required.

Who is the OIO?

The Overseas Investment Act 2005 (OIA) is administered and enforced by the Overseas Investment Office (OIO) which processes the applications made. It is based in Wellington and its team is growing quickly as it deals with more applications and enforcement.

When is consent needed?

Consent is required for an “overseas person”. In basic terms that means a person who is not an NZ citizen or a person ordinarily resident in NZ. However, it is worth discussing individual circumstances as it may be complicated to work out if a person/entity qualifies.

What about related parties back overseas?

Even if the entity making the purchase is not an “overseas person” they may be an “associate” of an overseas person. If, for example, someone overseas is controlling their actions or funding the purchase. If so, then approval will still be needed.

What level of control are you talking about?

This is a very wide definition and can be specific or general, indirect or direct and whether actually legally enforceable or not. It is trying to capture the individual that is acting for someone else who would need approval if they were the one that applied.

So what is a “sensitive” New Zealand asset?

This can be complicated to determine but generally includes:

certain types of land such as non-urban land of 5 hectares or more (that is, most farms);
acquiring 25% or more ownership or controlling interest in an entity which has businesses assets worth more than $100 million (exceptions apply for Australians and some others that increase that threshold); and
fishing quotas.

I am only interested in buying land – is it sensitive?

Determining if land is sensitive requires special analysis because, for example, it may include land that adjoins a reserve or public park or includes foreshore or seabed. So it may not be as simple as looking at the legal title description because you also need to look at what type of land there is surrounding it. Examples include land over 0.4 hectares that includes or adjoins reserves or historic or heritage areas, land on specified islands or if it is part of the foreshore or seabed.

If I need to apply then what do I need to show to get approval?

If you are an overseas person then when you make an application you will need to satisfy:

Investor Test (good character, have business experience, be financially committed to that investment); and
Benefit to New Zealand Test.

How do I show Benefit to New Zealand?

There are 21 criteria that the OIO will look at (eg will there be creation of new jobs). The OIO is also interested in understanding the ‘counterfactual’ – ie, what would happen if you didn’t make the investment (would someone else buy it, would they invest or not invest further money in it etc).

What if I am moving to New Zealand permanently, does that affect things?

Yes – in that situation you may not have to satisfy the Benefit to New Zealand test.

How long will all this take?

The OIO will categorise the application into one of three types and they will aim to respond within 30 – 70 working days, depending on the category of application. However, there is no statutory timeframe for the decision to be made so it could take less or more time, depending on the situation.

The OIO may also ask questions of the applicant which can delay the process so it is really important to get the application right when it is first submitted. Last year 22% of applications were initially rejected as they lacked information or were of poor quality.

In our experience the OIO process does take time to comply with but it is fairly straightforward. If you have questions about any of the topics mentioned above then we would be happy to discuss your situation with you.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance please contact Steven Moe at Parry Field Lawyers (348-8480) stevenmoe@parryfield.com

We have a lot of clients coming to us with a building project where the contractor or consultant proposes using a standard form contract. It can be confusing as to which one of these documents is best to use in different situations.

This is because different industry bodies have developed their own forms of standard contract. Sometimes having too many options means that there is confusion over the best one to use. In this article we have described the most common form of construction contracts and building contracts and given a comment about when they are most appropriate to be used. In the second part we have also set out what some of the key issues are that need to be considered every time (no matter what contract is used as a base).

Which form of building or construction contract?

Below we have set out the most common standard forms of contract. The references are to the most recent forms of each which is an important point to note because sometimes you may be given an earlier version. Generally the latest issued copy has been done for a reason and it addresses some inadequacy in an earlier iteration. So closely check what year the version you are asked to sign was issued.

NZS3910: 2013: This is one of the most commonly used construction contracts and is generally considered to be quite a “fair” standard form which is used for building and civil engineering construction.
NZIA: SCC1: 2014 The New Zealand Institute of Architects have produced this standard form which has a leaning towards protection of the architect involved in the project.
BuildRight BCC: 2016: This is a free document intended for use when constructing residential buildings in New Zealand. It can be requested on the Build Safe website. Note that it includes automatic provisions using their retention trust fund.
BuildRight BCS: 2016: As above, but this is for sub contract situations.
IPENZ and FIDIC: These two engineering bodies (the New Zealand Institution of Professional Engineers and the International Federation of Consulting Engineers) publish standard form documents which tend to include provisions that protect engineers.
NEC3: A suite of contracts that can be used for building projects but mainly used for large scale construction projects.
RBC1: 2016 (NEW BUILD): Prepared for use by Registered Master Builders it is available to them for use on building contracts.

In addition to those set out above their can be bespoke / one off forms which particular companies many propose be used. The important point here is that there are a variety of options when it comes to a building contract or construction contract. Knowing what the options are is a good first step to being able to decide which one would be best for your project.

Key issues to consider in your building or construction contract

There are a number of other practical points that should be covered in your agreement. Even if there is a standard position in one of the contracts above it should be read and ensure that you are comfortable with it. Key matters to consider include:

Indemnities: These are often “high risk” clauses, because they can trigger a liability to pay a sum of money without the party relying on the indemnity even needing to prove that the other party caused, or contributed to, a loss. It is important to be clear about what exactly will trigger an indemnity, who it will cover and whether it is reasonable in the circumstances to require one at all.

Limitation of liability and exclusion clauses: These are commonly included and essentially involve one party trying to get out of, or limit, their liability. Consider to what extent they should apply.
Insurance: The insurance position of each party should be clearly understood to ensure there is adequate insurance cover.
Construction Contract Act: If this applies then certain provisions will be included in agreements eg default provisions relating to payment.
Price and payments: How much is paid and when. This may involve setting out milestone and deliverables.
Variations: How will these be requested and priced needs to be set out clearly and understood.
Disputes: How will these be handled if they arise.
Reporting: What reports are required and when – this will be important to be able to monitor progress of the project.
Health and safety: Who is responsible for what and who is a PCBU at the work site. This is a hot topic these days and should be thought through in detail.
Sub contracting: To what extent will this be done, and who is responsible for this. This is about ensuring clarity about who will actually do the work.
Security: Many contracts contain an agreement to mortgage which could result (in the event of non-payment, or even in a dispute over payment) in a caveat being lodged against the title to your property.
Termination: Ability to terminate in which circumstances and what happens if that occurs.

Building contractors must give consumers a Checklist and a Disclosure Statement published by the Ministry of Business, Innovation and Employment prior to signing a building contract for all residential building work valued over $30,000.00 (including GST), or where the consumer asks for the information irrespective of the value of the building work.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Tim Rankin at Parry Field Lawyers (348-8480) timrankin@parryfield.com

We attended a webinar by Charities Services on the new reporting standards. There were 1,700 participants in the webinar so there was a lot of demand from people to learn more about the statement of service performance.

The main points which were covered included:

An overview of the new reporting standards;
The purpose of the statement of service performance; and
How the service performance standards might benefit charities.

The new changes came in relatively recently and introduced new standards for the not-for-profit sector. This seminar focused on the following two tiers which have different requirements:

Tier 3: Under $2 million (accrual based accounting required); and
Tier 4: Under $125,000 (cash based accounting).

In the past there were no requirements regarding financial information submitted – the new standards require that Charities provide a “Performance Report”. This includes both financial and non-financial reporting.

Non-financial information includes describing the entity and what it does. The second part involves a statement of service performance. The purpose of that is to “tell your story” – the both “outputs” and “outcomes” can be reported on. They distinguished those as follows:

Outputs – what was done eg goods or services provided (likely statistics will show this eg number of people helped); and

Outcomes – why it seeks to do or achieve that – this will be linked to the purpose of your charity.

They mentioned that graphs, charts and pictures can be used to show what you do. There is a template on the Charities Services website. Note that tier 4 only needs to record the outputs whereas tier 3 needs to record both outputs and outcomes.

The standards also require that previous years be compared to eg “100 attended” vs last year “90 attended” – this is not needed in the first year the report is done.

The webinar emphasised the positive aspects of preparing the document – it can be used for strategic planning, improving governance and marketing purposes. Clearly because it is new there must be many who are feeling like this is an added obligation on them and so they are trying to emphasise why it can assist a charity.

More information is available on Charities Services website here.

As the report is now compulsory for registered charities it is good to be aware of the requirements and get up to speed with these new requirements. If you have any questions about what is required then let us know as we are seeing some examples coming through and happy to share some ideas about preparing them.

We are providing new updates on other cases and developments in the charity sector regularly so sign up for our newsletter to stay up to date with the latest developments.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation.
Reproduction is permitted with prior approval and credit being given back to the source. 
Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions.
Copyright © Parry Field Lawyers 2017.

There was an interesting little piece in the NBR the other day: “Silicon Valley doesn’t care if you’re a Kiwi”. The person interviewed in Silicon Valley (Edith Yeung) said that basically the people over there are so multinational and most likely immigrants so they are not about where you are from it is all about the quality of the idea. A couple of the key quotes:

“If you tell me you have an Uber-like company for a particular market or another food delivery company, it’s likely we would not invest. Not because it’s not a good business, but because it’s going to be the 20thor 30th version of the same thing, A lot of entrepreneurs show me their product and they’re excited. But it’s really not about the product because if the founder is good, I’ll assume the product is good. The key thing is the person understands how the market works, along with the overall competition and their exact place in the world.”

I thought one of the more interesting and challenging other quotes was: “A great chef doesn’t always make a great restaurant owner”.

A few good points to pick up on there and apply to our own unique contexts – for us that is as we both deal with our clients in this area and also as we explore an idea for a new business ourselves.

Muhammad Yunus was in Christchurch this afternoon and spoke to several hundred people. He is from Bangladesh and received the Nobel Peace Prize in 2006 for his work in microfinance and microcredit. He founded Grameen Bank (http://www.grameen.com/) which focuses on loans being given to people in villages who are too poor to receive traditional bank loans.

He told us the idea began from wanting to help local people to avoid loan sharks and he thought – “why not loan the money myself”? So he was solving an immediate problem back when he began in the 1970s. He told us that he studied how banks operate and then he purposefully tried to do the opposite. For example, banks usually required collateral for the loans they make but Grameen Bank do not. Now there are 2,600 branches throughout Bangladesh with 9 million borrowers.

He also talked about social business and the idea that this could help to solve problems while still making money. He compared this with pure charity where the money has a “one time use” as it is used and then gone compared to a social business which is sustainable. In this context he talked about how profit might not be the only incentive for people to set up a business and that there could be other incentives – such as making people happy. It would have been interesting to gain more insights about what form of social business might work best in a New Zealand context.

He finished by commenting on the fact that the top 1% of the population owns 99% of the world’s resources and that the wealthiest 8 people in the world own more than 50%. This concentration of wealth into ever fewer hands is what he sees as a great danger and there need to be new ways to combat this. HIs main theme was to work to try and reverse the way the system currently runs and what motivates it to try and address this.

The session ended with some questions although I felt at the very end like there were a lot of unanswered questions and details that would be fascinating to find out more about and explore. I was also left wondering how the ideas, which seem to have worked well in rural impoverished Bangladesh, might apply in relatively wealthy/middle class New Zealand.

It was great to hear the challenges from a Nobel Peace Prize Winner and wonderful that the event could be hosted in Christchurch – well done to the SingularityU Christchurch (which led this) and the other partner organisations: Akina Foundation, Ministry of Awesome, OHU, Te Putahi, XCHC and CCC.

In the last blog post that you can access here on the JB Were “New Zealand Cause Report” we mentioned two key points it highlighted. This post quotes from the report and comments on some other aspects raised.

I thought the easiest way to quickly provide bite size information would be to include a few of the most interesting quotes:

The entire charitable sector plays a really important role in society: “There needs to be greater recognition that society works better with a strong and sustainable NFP sector.”
Regarding the amounts involved in the sector: “These values underestimate the real worth of the social output from the sector as they do not capture the true cost saving to society of their activities.”
As for the risk of charities not obtaining funding: “This risk of capital blockage may be starting to break with the growing interest in social and impact investing and the continued blurring of the lines between for-profit and NFP organisations.”
The number of new charities: “Since 2010 there have been 2.5 new charities commence each business day.” They note this may lead to an overall burden on supporters as more and more people are needed to be in Board positions.
On potential duplication of charities: “The real issue with charity numbers is the potential duplication of energies, ideas, incomes and assets and the lack of shared knowledge and potential public confusion and then inaction. It is a discussion worth continuing.”
Self-earned income: “Self-earned income needs to be a growing focus for most organisations. The blurring of the line between for profit and NFP will continue. While some will have philosophical debates, there is little doubt that economic growth (along with technology) has been the greatest driver of rising living standards and poverty alleviation, particularly n developing nations with microcredit a leading example. Business with a mission focus needs to be a large part of the future of the sector.”

Introduction

Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.
Lewis Carroll in Alice in Wonderland

New Zealand has an abundance of creative people with ideas for interesting businesses that often have social purposes at their core. Whether they know it or not, they probably fit in the definition of “social enterprises”. The number of individuals starting such social enterprises is growing. This will only continue as the next generation increasingly looks for meaning in work beyond simply returning a profit to shareholders. However, one thing New Zealand lacks in this space is a legal entity structure designed specifically for the implementation of those social enterprises.

The Cabinet paper released on 9 December 2016, “Social Enterprise and Social Finance: A Path to Growth”, is welcomed. However, more is needed than a cross-agency working group, the collection of statistics for further analysis and encouragement of investment. Instead, serious discussion of a new legal structure should be more firmly placed on the agenda. Failing to do that at this critical time represents a missed opportunity to proactively lead the way in this area.

The UK, Canada and the United States have all developed new types of social enterprise entities in the last decade. The key paper that started the process in the UK was issued in 2002, 16 years ago, so this is by no means a new concept. The lack of a legal structure in New Zealand is a real deficiency and we should not let the ‘number 8 wire’ mentality take over and mean that we simply make do and work within the existing frameworks.

If Roger Federer were given a cricket bat to play tennis I might have a chance at beating him. We use the right equipment that has been crafted specially for the particular game we are in. He could try and make do (after all, both a cricket bat and a tennis racquet are used to hit a ball) but despite being one of the best players ever he just won’t be as effective at playing the game. In the same way we can make do with existing structures for social enterprises that have some of the characteristics that we want. However, they do not recognise the key differences that distinguish social enterprises and set them apart. We need to ask for more.

In Part 1 of this paper we move beyond what exists currently and dare to dream big about what we would one day like to see. In Part 2 we discuss working within the existing constraints and what the current options are. A lot of time and energy is being spent on ways to create a better ecosystem for social enterprises. While that is important the hope is that this paper will generate discussion about the more fundamental point of the form of legal structure. If that were changed it would result in many other benefits for social enterprises which are now being focussed on as distinct issues at present (such as the ability to raise capital and a better profile and understanding of what social enterprises are).

Part 1: What could be (… the dream)

“I think there is a world market for maybe five computers.”
Chairman of IBM Thomas Watson in 1943.

There is real value in social enterprises because they do not rely on government funding or donations and instead operate as a business which employs people. However, their goals are not traditionally profit driven and instead may work to advance cultural, environmental, educational, social or other goals. They may also employ marginalised people and build locally based businesses which can contribute to particular geographic areas more than mass market or franchise models.

There are many barriers for social enterprises to overcome before they can flourish. It is easy to become distracted by all of those important issues (lack of specialised incubation, mentoring, funding options, financial and business experience, and immature support networks). The list is a long one although it is getting better. One could well argue that those issues need to be addressed prior to focussing on any development of a new legal structure. However, if we do not make changes now it will be even harder to do so in the future once more social enterprises, that have not even been thought of yet, have had to twist themselves around in order to fit into the current legal structures.

Instead of making do with what we have, a bold and innovative new approach is now required. This would place the debate about social enterprise and what it is at the top of the list for discussion. It would raise awareness and ensure this was also front of mind for those who are creating such businesses, as well as the broader community and traditional “for profit” businesses which could be challenged in their thinking and assumptions about their own business as well. Most important, it would result in a new form of legal entity tailored specifically for social enterprises.

Other countries have adopted legal structures specifically with social enterprises in mind. In the UK these are “Community Interest Companies” and in the United States there are “Benefit Corporations” and in Canada there are “Community Contribution Companies”. As this discussion progresses each of those will need greater analysis of how they work and what are the positives and negatives that can be learned from. The point for now is that they do exist and are a distinct form of new legal structures in those jurisdictions.

The fact that there is not a greater cry out for a change is a symptom of people facing other more pressing day to day challenges and not knowing that there might even be another option. And yet if another structure were available that might also be a way to address those pressing concerns regarding sourcing investors and funding, explaining the vision of a social enterprise and raising awareness of this sector.

To be specific, what we would like to see here in New Zealand is a new form of legal entity introduced which has the following key elements:

Clear name: A name for the new form of entity which makes it clear it is not a traditional limited liability company but also not a trust or incorporated society. This would assist to alert investors and others as to what type of entity it is.
Purposes: Requirement for clear articulation of the purposes (social, environmental, cultural etc) which show how they align with the social good while wrestling with the tension of also being a business.
Capped dividends: Restrictions in place on returning profits to investors to ensure that profit making is not the ‘primary’ objective.
Tax exemptions: Make the structure flexible enough so that for those who wanted to do so, and meet criteria, they could still apply for tax exempt status (this is not really a change since it can be done now).
Reinvestment: Profit/surplus to be reinvested into the purpose. Consider if there is a guideline or percentage fixed of what must be reinvested or it is left as a dynamic tension.
Reporting: Include a requirement for reporting not just on profit making goals but also on other social benefit goals.

Many of these concepts are foreign to traditional “for profit” business models and will take time to be discussed and understood. That there could be something more than maximising the dollar amount a company earns will take time to penetrate into the consciousness of society but it is something to be aimed for.

Of critical importance is the fact that the publicity around the new form of legal entity would raise awareness of social enterprises in New Zealand. As a result they would gain a new level of legitimacy and become better known. In addition, investment would be encouraged so they can grow because investors would understand what it was that they were supporting.

Part 2: What is (… the reality)

Door: It’s simply impassible!
Alice: Why, don’t you mean impossible?
Door: No, I do mean impassible. (chuckles) Nothing’s impossible!
Lewis Carroll in Alice in Wonderland

In New Zealand those who have a good idea for a social enterprise do not have a tailored legal entity structure that can be used. This means that when setting up here existing structures need to be adapted for use. Of course, as the quote says, “nothing is impossible”, and this section outlines the different models most commonly used. It also serves the purpose of illustrating why a new legal structure would be beneficial.

The most common approach we see is to set up an incorporated charitable trust or society which has a charitable purpose (so it is a “not for profit”). This approach can limit the scope of what such an entity does since it is constrained by staying within those purposes. We often see that the charity sets up a limited liability company which then operates as a trading entity making income and which ultimately seeks to maximise profits for its parent charity.

Other social enterprises adopt a direct limited liability company structure with charitable components, but operate in a manner consistent with their social enterprise purposes.

So, turning to the options in brief:

Incorporated charitable trust: The Charitable Trusts Act 1957 provides the framework for trusts and societies to incorporate. The entity needs to have a charitable purpose at its core (relief of poverty, advancement of education, advancement of religion or purposes that benefit the public). Profit is not distributed to private individuals. Provided its purposes are charitable it can also register with Charities Services under the Charities Act 2005. This type of entity can also apply for donee status (under the Income Tax Act 2007) so that donations are not taxed.

Limited liability companies: The Companies Act 1993 provides for companies to be registered where there is at least one director and one shareholder (they can be the same person). Profit is typically distributed to shareholders. It is possible to “write in” (by restrictions on activities) some social enterprise purposes in the Constitution of a company. Note that companies can also register under the Charities Act 2005.

Incorporated societies: The Incorporated Societies Act 1908 provides that members can form a society which requires a minimum of 15 members. The constitution or rules must set out its objectives.

Limited partnerships: Under the Limited Partnership Act 2008 there is a general partner and limited partners. This form of entity is slowly growing in popularity in New Zealand as it allows both commercial and charitable entities to work together without compromising their tax status. While it could be potentially used we do not think it is commonly considered as the other options are less complicated.

Co-operative companies, Maori land trusts and industrial and provident societies: We will not go into these in detail as we have only seen them used rarely and in specific situations but we simply note that they do exist and could potentially be structures that are used. The framework for them is the Co-operative Companies Act 1996, the Industrial and Provident Societies Act 1908 and the Te Ture Whenua Maori Act 1993.

We believe that the scenario we outlined above (a charitable trust which eventually incorporates a limited liability company as a subsidiary to run its trading arm) is most common and that is borne out by both anecdotal discussions and the limited research on this. The Department of Internal Affairs in 2013 published a paper on this topic and pointed to 421 respondents which it had surveyed. Of those 52 per cent (218 responses) were set up as charitable trusts. Incorporated societies made up 37 per cent while limited liability companies made up only seven per cent.

One of the main factors for any new business is access to capital. If a charitable trust structure is adopted then that lends itself to approaching individuals and groups for philanthropic grants or donations (particularly if it has tax exempt status). However, it is more difficult to attract private investors who share the risk since these entities do not return profits to shareholders and remain “charitable” under the Charities Act 2005. On the flip side of this dilemma, a limited liability company may struggle with attracting such private funding since there is an assumption that it is “for profit” because of the form of entity which is being used – in fact it has other objectives beyond returning a profit. Even if charitable purposes are built into the constitution this is still something which needs to be explained and automatic assumptions will need to be clarified.

Conclusion

Change is the law of life. And those who look only to the past or present are certain to miss the future.
John F. Kennedy

Where are we, and where do we want to be. Any new change will be difficult to understand at first – see an amusing example here. But we owe it to future social enterprises to try and make things better. This paper has outlined the currently available legal structures in New Zealand used by social enterprises. It has also set out the dream of what we would like to see some day in the future. We need change in this area. We need to request the right equipment to play the game.

In the foreword to the UK report “Private Action, Public Benefit: A Review of Charities and the Wider Not-For-Profit Sector” published in 2002, Tony Blair (it is long enough ago that he was the Prime Minister), commented as follows and about 17 years later these statements still resonate here and now for New Zealand:

“Much of the legal context for charity and voluntary action is now outdated … law and regulation have not kept pace with developments … There is also insufficient recognition in the legal system of the particular needs of social enterprises, a rapidly growing group of businesses carrying out a wide range of activities for the benefit of society rather than the individual. This report sets out a package of measures which will modernise the law …”

The result in the UK was the introduction of a new form of legal entity more than a decade ago. It is hoped that this paper will promote discussion about the possibility of turning the dream of such an entity for New Zealand into a reality sooner rather than later. Doing so would ensure that social enterprises are given a new framework in which to operate and succeed. That will ultimately benefit all of New Zealand and ensure that we continue to be forward looking and encourage even greater growth and investment in social enterprises.

Not unlike Alice in the quote at the start we need to work out where we want to go. How we get there will be complicated as there are many competing interests and points of view. Our intention in preparing this paper is to promote further discussion and engagement on this issue so that New Zealand can show real action in the area of social enterprises. With the social enterprise world forum being hosted in Christchurch in 2017 it is the right time to consider this issue and take action now.

Contact: stevenmoe@parryfield.com

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions. Copyright © Parry Field Lawyers 2017.