The law recognises that in certain events which are beyond the control of a party that it is not fair for that party to have to continue to comply with the contract.  In light of COVID-19 it is prudent to consider if the pandemic might be a trigger for this in your contracts.

The first step is to check what the contract actually says.  It won’t apply if there is no such provision in the contract.  Normally it will be called a “Force Majeure” clause.  The courts will generally have a high standard if a party wants to rely on this as a grounds to not fulfill the contract.  The sort of factors which will be relevant are:

  • How are the events described?  Is it generic or specific?  In this particular case it will be relevant to see if there is any reference to “disease” or better, epidemics?  If there is a reference to an “Act of God” then that might arguably cover this too.  The most important thing is to check the specific words.
  • Even if there is an event, does that mean that the performance cannot be done?  Just because something costs more doesn’t make it impossible – it may be that you still have to comply.  Again, the context is key.
  • A party needs to be in control – one of the things I have seen is some arguments that a “strike” should be a force majeure event – if it is listed then it may be, but typically the management can control a strike occurring, or not.  So, it might not qualify as a force majeure event.  When it comes to COVID-19 again it may be that a party has no control.
  • The last factor relates to mitigation.  A party should take steps to ensure that the contract is complied with (ie they are mitigating and stopping the impact, if they can).The key point here is perhaps that the wording of the contract needs to be reviewed.  If there is no such clause then it might be possible for the doctrine of frustration to apply – this is where an event makes performance impossible compared to what had been agreed.  Again, context is key.The other thing to look for in contracts would be a “material adverse change” clause – these can apply where an event occurs that means the contract is affected.  You should also review any termination clauses just to see what they provide for eg 30 days written notice?Start by reviewing your contracts and consider your current situation and what the next few weeks and months will hold.  If you would like to discuss your contract and situation then we would be happy to do so.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com at Parry Field Lawyers.

Uncertain times require stong leadership from company directors.  We are each adjusting to a new normal of video conferences replacing meetings and realising how much time we previously wasted on travel.  But there are also immediate and difficult questions which directors of companies are faced with as the implications of a nationwide lock down continues.  In this article we want to ask some of those hard questions so that you can proactively begin to prepare for the coming weeks and months.

Do Director duties apply still?

Yes, these continue even in difficult times.  They are outlined in detail in this article but the key ones relate to acting in good faith and in the best interests of the company (section 131) and acting with the care, diligence and skill of a reasonable director (section 137) taking into account:

  • the nature of the company;
  • the nature of the decision;
  • the position of the director; and
  • the nature of responsibilities undertaken by him/her.

The other duty which will be getting a lot more attention, if there is the impact on the economy predicted, is section 135 around reckless trading.  A director must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. This duty is aimed at preventing conduct by the directors which could jeopardise the company’s solvency. Unlike the best interests duty, the directors’ personal opinion as to the company’s ability to continue trading is irrelevant. Instead, a Court is likely to ask: “Was there something in the financial position of the company which would have alerted an ordinary prudent director to the real possibility that continuing to carry on the business of the company would cause serious loss to the creditors?”.  In the context of COVID-19 this is going to become a lot more relevant to consider.

Key considerations

As well as making sure you are complying with Director Duties it is important to think widely about all the stakeholders of the company rather than just the shareholders.  This includes employees, suppliers, customers – how are each of these groups impacted and what is the flow on effect on the company?  You might want to have an action plan regarding:

  • Employees: How are they doing?  Is clear messaging going out about the status?  How can you help reduce stress and anxiety through eg zoom catchups?
  • Wage subsidy: Will there be a 30% predicted drop in revenue?  If so, explore the subsidy described here.
  • Leases: Have you got one?  Read this article if so as now may be the time to contact your landlord.
  • Bank funding: Talk early with your funder and ensure you know what the position is in relation to any loans you have.  Are there any other funding sources to be exploring?
  • Shareholders: Is it worth considering raising some more capital from them (depends on unique context of your company as to whether that is an option but extra liquidity might not hurt).
  • Contracts: Do any of them have force majeure clauses in them – for your benefit, or not – that might mean these get paused? What impact will that have on your revenue? Have a read of this article for more on this.
  • Overseas suppliers/customers: Is there someone overseas that may have issues continuing due to the shut down that will flow on to impact you?Having considered all these factors does it impact on the viability of the company?  Is there a risk of later realising that the company was trading recklessly?  Can it continue to enter into new obligations if there is uncertainty about future revenue?  Is there some external advice required to make good decisions?

Conclusion

The point of this article and these questions is not to inspire fear it is to get directors thinking about the actual position of their company in light of many complex factors at work right now.  Directors should be asking questions of management – perhaps requesting more frequent updates and meetings – and documenting what their decisions are in minutes so there is a record of what they decide.  We will get through this and strong leadership from Company directors will be vital for organisations to cross the bridge and get to the other side of the crisis.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com

We are aware that a number of employers are unsure at this time about what they need to pay employees and whether they should apply for the Government Subsidy or not.

The Government is regularly clarifying aspects of the Subsidy and the below is our current understanding of how it may apply as at 27 March 2020.

Do employees still have to be paid?

  • As a general rule, where employees are, apart from the shutdown, otherwise willing and able to work, employees are entitled to be paid by their employer. This will be informed by the following however and the terms of each employee’s employment agreement.

What are some possible relevant clauses in the employment agreement?

  • Check to see what the agreement says on such things as unpaid leave, special leave, annual leave, what happens in a pandemic, reducing hours, varying agreements, or, in a worst case scenario, redundancy.
  • Remember however that, any proposed changes to such things as the employees’ usual hours of work or pay, regardless of what the employment agreement says, should be discussed with employees in advance (i.e. consultation, listening to their feedback/suggestions), rather than simply presented to employees. Any agreed variation should also be recorded in writing between the employer and employee.
  • The duty of “good faith” continues to apply, even in these difficult circumstances. In layman terms, “good faith” simply reflects the “golden rule” and means treating your employees like you would like to be treated (or how you might like a member of your family to be treated by their employer).

The Government subsidy – general information

  • See our earlier article here on applying for the Subsidy.
  • Where employees will not actually be physically working or will work for less than their usual hours, say from home, the short-fall, up to 80%, should be recorded as special paid leave.
  • So, if an employee is not working at all, the 80% will be recorded fully as special paid leave.  If the employee is working half their usual hours, half will be recorded as usual wages/salary and the other half, up to 80%, would be recorded as special paid leave.
  • The Government Subsidy must then be used by the employer towards their 80% contribution (or any additional wage payments the employer decides to make to employees).
  • The balance – 20% – will need to be discussed and agreed with employees and could be a mixture/combination of unpaid leave, annual leave, sick leave or additional special paid leave.  If agreement cannot be reached on employees taking annual leave, the employer can direct employees to use annual leave but only on 14 days’ notice.
  • The advice we have received on taxation of the Subsidy is that:
    • the wage subsidy payment will not be subject to GST;
    • the wage subsidy paid to the employer will not be taxable;
    • the wage subsidy paid to the employee, by the employer, will not be deductible; and
    • the wage subsidy is taxable to employees, being included as part of their normal wages and therefore being subject to their usual PAYE, Student Loan, Kiwisaver deductions, etc.

“What are Best Efforts?”

What about if I’m unsure if I can pay staff 80% of the usual wages for 12 weeks or whether I might ultimately have to make employees’ redundant?

  • The terms of the subsidy refer to employers making “best efforts” to retain staff and pay staff at least 80% of their normal income for the subsidised period (in order to qualify for the subsidy).
  • As at 27 March 2020, the Government has clarified that, if an employer has made “best efforts” but cannot pay staff 80% of their usual salary/wages, an employer may still claim the Subsidy but must pass on the whole of the subsidy to their employees.
  • An employer will still need to be prepared to demonstrate the steps it took, prior to that time, to avoid that situation. In other words, what evidence do you have of your “best efforts.”  This could include:
  • Seeking third party financial assistance, such as from a bank or landlord or suppliers (i.e. further funding, mortgage holidays, interest free terms, deferred payments, staggered payments etc);
  • Seeking advice from the Chamber of Commerce, a relevant industry association or your accountant; and
  • Discussing with staff about whether they would be prepared to take their annual leave or sick leave entitlement to top up the Government Subsidy or accept reduced paid hours/unpaid leave.  This could include only being paid the amount of the Government Subsidy, if necessary.
  • MSD will have the ability to check applications and verify information at a later date, including an employer’s declaration at the time of application that they will make “best efforts” to retain staff and pay at least the 80% cap.

What about in a worst case scenario and I need to look at making employees redundant?

  • As at 27 March 2020, the Government has clarified that, in order to claim the Subsidy, employers must keep employees in employment for the period of the Subsidy (even if they are only passing on the Subsidy to employees to keep them in employment).
  • It remains unclear what will happen if an employer claims the Subsidy but then makes an employee(s) redundant but it is possible (but not yet confirmed) that employers may need to repay the Subsidy relating to those employees, or at least, relating to the period of time after the employee’s employment ended.
  • Employers will also need to again be prepared to demonstrate what steps they took to retain staff prior to that time.
  • If a redundancy is undertaken, employers should again check the terms of their employment agreement to see what it provides regarding redundancy. For example, it may define when an employee will be considered redundant, the process that must be followed, what notice must be paid out, and whether any redundancy compensation is payable.  The terms of the agreement will need to be followed.
  • A fair process, carried out in “good faith” will again be required, although consultation will need to be done by email, telephone or applications such as “zoom” and relevant timeframes for consultation and decision making may be able to be reduced.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. Please feel free to contact  Hannah Careyhannahcarey@parryfield.com or any of the team should you need assistance.

As we are in the midst of an uncertain time there are lots of different questions and things to consider. For business owners, how can COVID-19 impact your commercial leases?

If you have such a lease, the impact of COVID-19 depends what it says – so it is worth checking your agreement with the Landlord. If you have a recent ADLS version Deed of Lease (which is industry standard) then there is a definition of “Emergency” which includes an epidemic. Clause 27.5 then has provision about access to the property in an emergency that refers to “a fair proportion of the rent and outgoings shall cease to be payable…” in some circumstances where you are unable to access the premises as a consequence of the emergency. Use that clause as the basis to talk with your Landlord in the coming weeks.

As a side note, if you only ever signed an Agreement to Lease, don’t panic that it doesn’t have that clause, as the Deed of Lease provisions are deemed to be incorporated into the Agreement to Lease as well (if it is an ADLS form) – see clause 4 of the ADLS Agreement to Lease form.

At this time we want to support businesses who have questions about what they should do next and we will be posting comments on issues we see arising from time to time.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. If you have any questions, please feel free to contact Steven Moestevenmoe@parryfield.com, Kris Morrisonkrismorrison@parryfield.com or Paul Owenspaulowens@parryfield.com at Parry Field Lawyers.

The Government will support employers if you face laying off staff or reducing their hours because of COVID-19. But you must meet certain criteria to be eligible – described here.

How much?

The amount involved is paid at a flat rate of $585.80 to a person working 20 hours or more per week and $350.00 to a person working less than 20 hours per week. That is a payment of $7,029.60 for a full time employee and $4,200 for a part time employee.

Criteria to apply?

First, check 2019 revenue against 2020 revenue. Has there been a 30% actual or predicted decline? If so, then you need to confirm:

– the decline is due to the impact of COVID19;
– you will make best efforts to retain staff and pay them (at least 80% of their usual pay). This should be over the – 12 weeks subsidy period;
– you have taken active steps to mitigate lost revenue eg consulting with your bank or advisors; and
– Staff provide consent for details (names, contacts, IRD numbers) to be provided to MSD.

It is worth emphasising that a predicted drop of income will suffice, so employers should put together a list of factors supporting a predicted drop. That could include the obvious, such as staff not being able to work at all but also, where staff can work remotely, not all staff being able to work for 8 hours a day due to technical constraints or clients being in non essential industries.

Other steps to take

We suggest that you document last years revenue vs this year. If you’ve existed for less than a year choose a reasonable month last year to compare with. MSD have noted that they have power to investigate later and it seems likely that some will abuse the system – so best to document both what revenue was and is predicted to be, as well as a list of what steps were taken to mitigate impact.

This article is not a subsitute for legal advice and you should contact your lawyer about your specific situation. If you require any assistance with this, please feel free to contact Hannah Careyhannahcarey@parryfield.com or Steven Moestevenmoe@parryfield.com at Parry Field Lawyers.

We live in unprecedented times. In this short guide we have set out key issues which we think Businesses in New Zealand should be focussed on.

We will update this article as we have further information and expand it more.

Key Information

We recommend looking at this site for the latest Government announcements on COVID-19.

Government support

The government has confirmed that this wage scheme and leave scheme apply to businesses (this includes registered charities, non-government organisations, incorporated societies and other entities). These groups can apply if they meet the qualification criteria. We found that this information was the best to refer to but this summary from Deloitte is helpful as well.

Contracts

Consider seeing what they say about “Force Majeure” events – things outside of your control – there may be provisions which help to delay provision of services or goods at this time. Is some renegotiation needed around the terms? Price? Timing?

Governance

We suggest this is a great chance to look back at your purposes and ensure that they are being followed. Why not also check policies and other rules? We also suggest you ask questions as a governing body to ensure that everyone understands the finances and budgets – how will they be affected? Finally, if you are making important decisions then record them in minutes of meetings. It may be that due to physical distancing you will need to adjust how you have meetings – we use Zoom.

Leases

If you have a commercial lease have a look and see if there is an “Emergencies” clause. If you have such a lease it depends what it says – so it is worth checking your agreement with the Landlord. If you have a recent ADLS version Deed of Lease (which is industry standard) then there is a definition of “Emergency” which includes an epidemic. Clause 27.5 then has provision about access to the property in an emergency – see the screen shot – that refers to “a fair proportion of the rent and outgoings shall cease to be payable…” in some circumstances where you are unable to access the premises as a consequence of the emergency. Use that clause as the basis to talk with your Landlord in the coming weeks.
As a side note, if you only ever signed an Agreement to Lease, don’t panic that it doesn’t have that clause, as the Deed of Lease provisions are deemed to be incorporated into the Agreement to Lease as well (if it is an ADLS form) – see clause 4 of the ADLS Agreement to Lease form.

Other issues

Here are some articles from our website that may be worth a look as well on the topics of good governance, electronic signatures, relief against forfeiture, employer issues, director duties and liquidations.

Questions?

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com

We live in unprecedented times. In this short guide we have set out key issues which we think Charities in New Zealand should be focussed on.

We will update this article as we have further information and expand it more.

Key Information

We recommend looking at this site for the latest Government announcements on COVID-19. Also, note that there is a specific page for community groups where there is more detail – in particular for eg Churches, regarding gatherings, here.

Government support for Charities

While initially unclear, the government has confirmed that this wage scheme and leave scheme apply to registered charities, non-government organisations, incorporated societies and other entities. These groups can apply if they meet the qualification criteria. We found that this information was the best to refer to but this summary from Deloitte is helpful as well.

Charities Services guidance

Charities Services have published this guide and key points to note are:
• They remain open and will continue to operate to process registrations etc;
• Annual returns can be extended – best email for info is info@charities.govt.nz;
• Charities Services will not be accessing their post during the shutdown so contact by email;
• They suggest formally postponing AGMs if needed.

Governance

We suggest this is a great chance to look back at your purposes and ensure that they are being followed. Why not also check policies and other rules? We also suggest you ask questions as a governing body to ensure that everyone understands the finances and budgets – how will they be affected? Remember, there are obligations as trustees which need to be complied with, for a summary see here. Finally, if you are making important decisions then record them in minutes of meetings. It may be that due to physical distancing you will need to adjust how you have meetings – we use Zoom.

Contracts

Consider seeing what they say about “Force Majeure” events – things outside of your control – there may be provisions which help to delay provision of services or goods at this time. Is some renegotiation needed around the terms? Price? Timing?

Leases

If you have a commercial lease have a look and see if there is an “Emergencies” clause. If you have such a lease it depends what it says – so it is worth checking your agreement with the Landlord. If you have a recent ADLS version Deed of Lease (which is industry standard) then there is a definition of “Emergency” which includes an epidemic. Clause 27.5 then has provision about access to the property in an emergency – see the screen shot – that refers to “a fair proportion of the rent and outgoings shall cease to be payable…” in some circumstances where you are unable to access the premises as a consequence of the emergency. Use that clause as the basis to talk with your Landlord in the coming weeks.
As a side note, if you only ever signed an Agreement to Lease, don’t panic that it doesn’t have that clause, as the Deed of Lease provisions are deemed to be incorporated into the Agreement to Lease as well (if it is an ADLS form) – see clause 4 of the ADLS Agreement to Lease form.

Other guidance

There is a lot out there – but here are some resources:

• For those in Churches, we have created this book – the principles would apply to any charity.
• Philanthropy NZ have issued this helpful summary of things to consider for COVID-19.
• As mentioned above, check out the Charities Services link here and what they refer to.

On March 26 2020, the Government announced more support for community groups. You can find out more here.

Questions?

This article is not a substitute for legal advice and you should consult your lawyer about your particular situation. Feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com  at Parry Field Lawyers.

Are you an entity that carries on business for the benefit of a registered charity? Then it is essential that you are aware of the incoming changes to business income tax exemptions. This article explains what the current law is and how the incoming changes will impact both registered and unregistered entities.

A key benefit of being a registered charity is enjoying the tax exemptions on business and non-business income set out in the Income Tax Act 2007. Under section CW 42, registered charities do not need to pay tax on their business income provided that they carry out their charitable purposes in New Zealand. However, the section goes further and extends the exemption to entities that carry on business for the benefit of a registered charity. This means that businesses can benefit from this exemption without registering with Charities Services. Therefore these businesses are not obliged to comply with the charity reporting requirements.

The Government has been concerned that some businesses may be taking unfair advantage of the provision, undermining the transparency and accountability mechanisms in the Charities Act 2005. As a result, the Taxation (Annual Rates for 2018-2019 Modernising Tax Administration, and Remedial Matters) Act 2019 narrows the eligibility for this exemption. Taking effect from the 2020-2021 income year, an entity must be registered as charitable to be eligible for a business income tax exemption. This means that an unregistered entity carrying on business for the benefit of a registered charity is no longer eligible.

This will have an impact on companies that are owned by a charitable trust. From 2020, the charity’s registration will no longer shield that company from income tax obligations. Entities that are currently relying on another’s registration need to consider whether they are eligible for charitable registration in order to retain this benefit. This could involve revising the constitution of the business and making clear it is sending profits to the charity.

 

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Our team is experienced with charities, social enterprises and trusts that are common in this area of law. We would be happy to assist you in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or 021 761 292 should you require assistance.

We live in a time when paradigms are colliding. Old conceptions from an extractive economy which have been accepted for decades are being challenged by new ideas that are planted in the soil that dreams of a regenerative economy. One outworking of this is the growth of “Impact Investing”. In this paper we outline what that is, why it matters, discuss examples and cover the implications for NFPs interested in this area.

 

What is Impact Investing?

Traditionally, the primary driver when looking at an investment has been monetary returns for the investor. “You can offer a 9% return on investment? Well, I can get the 11% over here…” However, such an outlook is limited and narrow because it is only focussed on financial returns.

 

Impact investing offers a different and more holistic approach. The Global Impact Investing Network provides the following definition: “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

 

So the alternative presented by impact investing is that there are other considerations that need to be thought about beyond financial returns, such as:

  • What does the business actually do – is it an extractive business which is harmful to the planet?
  • Who does the buisiness employ – is the business model built on the premise that there is exploitation in how cheaply it can produce whatever it makes, either onshore or offshore?
  • What other outcomes are there – perhaps social, cultural, environmental or other factors will be mpacted by the business?

 

Key attributes

Some of the key attributes of impact investing include a desire to achieve a positive social/environmental (or other) impact, a plan to measure this impact and an expectation of generating a financial return on the capital invested. So in an NFP context, this is more than just grant making (or receiving) as the funds actually come back to the investor. The key is that there will be some positive impact through the investment, while still generating positive return for the investor. This also means an investor may need to think a bit longer before they decide what to invest in.

 

How does Impact Investing Work?

Impact investing is not a one-size-fits-all model. Different investors may have different impact and financial aims, meaning the form and terms and conditions of investment will be different in each scenario. However, to create a level of consistency, the International Finance Corporation has created a framework for managing impact investing.

 

 

Source: Investing for Impact: operating Principles for Impact Management, IFC, 2019,

https://www.impactprinciples.org/sites/opim/files/2019- 06/Impact%20Investing_Principles_FINAL_4-25-19_footnote%20change_web.pdf

It is worth noting that there are different types of impact investing (e.g. managed funds, CDFIs (Community Development Finance Institutions), SIFIS (Social Investment Finance Intermediaries), social impact bonds, direct investment, investment clubs and catalytic investment).

 

Why is Impact Investing Important?

Increasingly, organisations are being pressured by both shareholders and stakeholders to achieve a social impact alongside financial returns. Larry Fink, CEO of Blackrock (the largest investor in the world at around US$6.8 Trillion) has stated, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” According to the Morgan Stanley Institute for Sustainable Investing, 85% of investors surveyed were interested in engaging with Impact Investing. It is clear that funders are now expecting more from the organisations they choose to invest in.

 

A Broader Shift?

This represents an expanded view of the role companies play and to whom they are accountable. While companies have traditionally focused on achieving the best financial outcome for their shareholders, the interests of stakeholders is becoming increasingly relevant. The Companies Act 2006 of the United Kingdom focuses on promoting a company’s success, “for the benefit of its members as a whole.” Impact investing is only one aspect of a much broader shift in thinking that is challenging (and hopefully transforming) the shareholder capitalist order.

 

Examples of Impact Investing in NZ

It is useful to look at some examples of impact investing to show this is more than just a theoretical discussion.

 

Ākina

The Ākina Foundation is dedicated to transforming the values of the New Zealand economy by supporting enterprises and businesses in creating positive impact for the land and people of Aotearoa. Ākina is leading the way in Impact Investing, co-establishing New Zealand’s first impact investing fund. The Impact Enterprise Fund manages $8.7 million and has supported several projects, including Waikaitu and Melon Health. Ākina also introduced Impact Investment Readiness Grants to provide social enterprise and impact-driven businesses support to become “investment-ready”.

 

Purpose Capital Impact Fund

The Purpose Capital Impact Fund has raised $20 million and is aiming to raise $30 million to, “generate meaningful impact and financial returns in its regions and across New Zealand.” Having already reached its initial target, it is one of New Zealand’s largest impact investing fund. The Fund focuses on tackling big issues such as affordable housing, environmental degradation, climate change and inequality and aims to generate financial returns of 5-6% per annum (net of fees and expenses).

 

Community Finance

Community Finance provides low cost finance to New Zealand’s Community Housing Providers to build new, safe and affordable homes for Kiwis (disclaimer: the author is he chair of this company). Their finance model enables investors, philanthropists and foundations to invest in a meaningful and ethical way to help develop thriving, diverse and inclusive communities. Their lending platform, called the “community-to-community model”, enables investors to ethically invest for the benefit of communities and help make a positive impact. Investors receive regular reports on the direct social impact of their investment as well as a financial return of between 2% pa and 2.50% pa, which is similar to the financial returns on corporate bonds and term deposits. Community Finance has partnered with a range of Community Housing Providers including the Salvation Army, Habitat for Humanity and Community Housing Aotearoa to activate new housing supply where it is most needed. Community Finance also has three pilot projects under way in Auckland, as well as emergency transitional, social and affordable housing projects in Bay of Plenty and Christchurch.

 

What does this mean for New Zealand NFPs?

By just relying on grants, NFPs are reliant on other activities (such as fundraising) to raise funds.Conversely, the tenets of traditional investment may clash with the charitable purposes of aNFP. Impact investing provides NFPs with a unique way to invest funds in accordance with their charitable purposes (or potentially to receive investment themselves). The trustees of a charitable trust may be able to invest the trust’s assets in projects that are making an impact, while receiving a return.

However, impact investing isn’t for everyone and there are many things that a NFP should consider before engaging with this new model of investing.

 

Option B: Those seeking to Invest

What do NFPs need to consider when exploring impact investing within their future investment plans?

It is important for NFPs consider what impact they want to achieve – is the way they have always done things the only way? One option that could be considered is through investing for impact. Critical to this is how to measure impact and set expectations and create accountability. The NFP will also need to address what to do if the impact is not achieved.

As with any form of investing, impact investing carries risks which NFPs should consider. For example, as impact investing is an emerging concept, there is less capital in the market. This means that it may be harder to sell investments if capital is needed. NFPs need to think about whether they will be in a position to wait the full duration of the investment. What are the primary motives – purpose or profit or both?

 

What types of projects suit this model of investment?

There are different types of projects that NFPs may invest in. An organisation may seek seed funding, allowing them to research and develop new ideas. Alternatively, money may be invested to grow an existing project or enable a business to perform a contract (e.g. social bonds). Finally, impact investment can allow an organisation to purchase assets which will provide revenue over time.

 

What legal questions does an organisation need to take into consideration before embarking on this model?

The governing body of a NFP must ensure their investing activity complies with legislation and their governing documents. For example, Sections 13A and 13B of the Trustee Act 1956 enable trustees to invest prudently in any property. This means that trustees must exercise care, diligence and skill when investing trust assets. Section 13E sets out a list of factors that trustees may consider when choosing to invest. It is important that trustees seek professional advice when choosing to invest and take steps to reduce the risk of breaching their duties.

The trustees must also ensure they are complying with the trust deed. The trust deed may direct trustees how to use the trust’s assets and have instructions on investing. The charitable purposes of a registered charitable trust will also guide the trustees as to the type of projects they should invest in. Where possible, it may be beneficial to amend the trust deed to expressly allow the trustees to carry out impact investing. If the trustees are unsure of their obligations, it is recommended that they obtain advice.

 

Positives

There are many positive aspects of impact investing. It represents the future of investing, as traditional views of business and charity are being challenged. Impact investing also diversifies income streams, opening up new opportunities to generate income while making a positive impact. And it empowers others through more than just providing grants. While there may always be a place for grants in the NFP sector, impact investing widens the scope of both fundraising and investing and successfully integrates profit with purpose.

 

Challenges

While impact investing is an exciting and emerging concept, there are several challenges that must be addressed to ensure its growth. Key challenges include:

  • Readiness: while there are many opportunities to create impact in New Zealand, some entities are not yet ready to seek investment. Groups that would traditionally seek grants may lack the training to engage with investors. This means that more resources need to be allocated for preparing these organisations for investment.
  • Greenwashing: as impact can be hard to measure, there is a fear that organisastions may claim their product/service creates a positive impact but, in reality, has very little social/environmental benefit. This means standards to measure impact must continue to be developed and investors need to have clear reporting mechanisms to ensure accountability
  • Inefficiency/difficulty: in a 2016 survey carried out by Ākina, 10% of organisations surveyed had sought impact investment but had found the process difficult and inefficient. They also noted that there was often a disconnect between the objectives of the investor and investee. This means that organisations need to consider how to make impact investing more accessible to organisations and investors need to clearly set out their expectations before investing.

 

Impact investing is here to stay and we are confident it will grow as more people step back and think through how they are investing their funds. It represents one element of a broader shift in thinking, as the traditional values of investing and capitalism are challenged. While not all organisations will be able to engage in impact investing, NFPs should consider how they can best achieve their desired impact and whether impact investment is the way forward. They should think about what impact they want to achieve, how to measure that impact and how to manage the risks of investment. Finally, they should ensure they comply with any legal obligations imposed on them to prevent a breach of duty. We look forward to see how impact investment reconciles profit with purpose, for the benefit of shareholders, stakeholders and the future of Aotearoa.

 

Should you need any assistance with these, or with any other NFP matters, please contact Steven Moe at Parry Field Lawyers stevenmoe@parryfield.com (+64 3 348 8480).