When is a charitable company the best option?

It is a common understanding that Charities must be trusts. However, of the 28,000 total registered charities many of them are other entity types such as incorporated societies, associations and companies. What did you have for breakfast? A famous example that probably was involved in supplying some part of that is the registered charitable company is Sanitarium.

It would be suitable for a charitable company to be used where the entity has a purpose that is capable of fitting one of the four heads of charity: advancing education, relieving poverty, advancing religion or other purposes that benefit the community. In describing this purpose, it will need to be ensured that it does not stray into “helping entrepreneurs” as the entity should not be about individuals making more profit.

Setting up a new legal entity that is a charitable company does two things. Firstly, it helps to crystallise the identify for a project in mind which will be helpful when talking with collaborators, customers, other unions and government. Secondly, it will “ring fence” liability so if something goes wrong, only that new entity ends and it does not cross infect to other persons or entities.

As the entity has a hybrid structure it also has hybrid obligations. The new entity would need to register with Charities Services. A registered charity will ensure:

Credibility with others such as philanthropic trusts or Councils;
A better tax position; and
The ability to give donation receipts to those who donate (as they get 1/3 back).

The company would also need a constitution that sets out how it operates and importantly makes clear the charitable purpose and prevents private gain. You can pay salaries from the company but they must be at market rate.

There are many times when a charitable company will be the best legal structure to choose – don’t just assume that you should set up a charitable trust.

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This article is not a substitute for legal advice. If you have any questions or would like advice on your specific situation and objectives feel free to contact one of our charity specialists Steven Moe, Michael Belay, Sophie Tremewan or Yang Su at Parry Field Lawyers.

Background

Since 19 September 2022, applications for Investor 1 and Investor 2 visa categories were replaced by a new category: the Active Investor Plus Visa (“AIP Visa”). New Zealand Trade and Enterprise (“NZTE”) has published guidance about the eligibility and what are acceptable investments under the new Visa. The guide was set up to explain this investment program, and to assist deal makers and capital raisings who hope to have deals or funds approved as acceptable investments.

The Government’s aim is to attract experienced and high-value investors to encourage greater economic benefit to New Zealand companies and the economy. The AIP Visa allows experienced investors to add to opportunities for companies and start-ups. You get points toward your visa if you are willing to invest in companies here.

An investor must also have a reasonable command of English to qualify for an AIP Visa (a minimum of Level 5 under the International English Language Testing System or the equivalent). As explained in our article Immigration Changes Overview, “acceptable investments” for an AIP Visa are made between NZ $5 million and $15 million. Different investments carry different weightings for the purposes of an AIP Visa application.

Direct investments

These are direct investments into businesses, and they receive the highest weighting of 3x (every $1 invested counting as $3 towards their visa conditions). In this case, an investment of only $5 million is required.

To qualify as a direct investment, some conditions must be met:

Firstly, a direct investment is an investment in a New Zealand resident entity and privately owned business;
An application for approval may be made either before the AIP Visa applicant makes the investment (classified as a current direct investment), or retrospectively (classified as a historical direct investment);
NZTE will consult an external advisory panel which helps them to determine whether the direct investment meets the AIP Visa eligibility criteria; and
For each direct investment, you must apply and receive and approval letter from NZTE for such direct investment to qualify.

There is no cost to apply for approval as an acceptable direct investment and any decision made by NZTE is final.

Indirect investments

A. Acceptable managed funds

Investments into private funds, such as private equity or venture capital funds are also upweighted but only 2x and an amount of $7.5 million is required (every $1 an investor invests into managed funds, counts as $2 towards their visa conditions).

To qualify as an acceptable managed fund, additional conditions apply :

The fund has to be a New Zealand resident, entity which means:
- Be incorporated in New Zealand;
- Have its head office in New Zealand;
- Have its centre of management in New Zealand; and
- Have control, by company directors, exercised in New Zealand.
It must meet the criteria in the AIP Visa Immigration New Zealand Instructions. The applicant should provide:
- Evidence of incorporation in New Zealand from the New Zealand Companies Office;
- Evidence that the fund manager will be registered on the New Zealand Financial Services Providers Register (per Appendix 15 of the Immigration Instructions);
- The full legal names and addresses of current directors;
- A summary of the fund’s background, proposed activities, status, target fund size. It should contain details about how the Managed Fund supports New Zealand being a responsible member of the world community, and demonstrates that the Managed Fund will not invest in anything which may prejudice New Zealand’s reputation;
- An overview of the investment thesis of the Managed Investment. The application form must detail how the Managed Fund will deliver on the requirements for actual or potential growth of investee entities and/or their contribution to positive social and economic impacts for New Zealand; and
- A summary of any social, environmental or governance (ESG) policies applicable to the organisation.
Submit an application using the NZTE Investment forms;
Be assessed as an acceptable investment and be added to the Acceptable Managed Fund list maintained and published by NZTE;
Pay the application fee of $1,500 NZD (GST inclusive) per application;
Once the application is submitted, NZTE will provide an invoice for this charge via email.

To qualify as an eligible recipient of Indirect Investment, the applicants must be a New Zealand resident entity that invests in private New Zealand businesses, with no investment in listed equities and/or fixed income assets such as bonds.

NZTE considers whether the Managed funds invests wholly or substantially in entities with a New Zealand connection. A minimum of 70% of the net committed capital must be made available for the investment in entities with a New Zealand connection.

An external advisory panel makes recommendations to NZTE on whether the Managed Fund investments are acceptable. The panel sits monthly and the dates are published online.

Annual re-certification is required to maintain an “Acceptable Managed Fund” status. NZTE will notify any approved managed fund when annual re-certification is required.

Property is not an acceptable investment, however it can be 20% or less of an exchange traded fund or managed fund’s total assets.

B. Listed equities and philanthropy

These investments (such as investment in NZX listed companies) do not receive an additional weighting, and each are capped at 50% of the $15m investment requirement. An investor could meet the required investment amount by investing $7.5m into listed equities and $7.5m into eligible philanthropic causes.

Key time periods to consider are:

The minimum investment period: the investor should invest across three years and maintain the investment for a further fourth year;
The minimum time required in NZ: the investor should spend 117 days in New Zealand across the four-year conditional visa period, or around a month a year; and
Despite these requirements, New Zealand is still quite restrictive on home ownership and processing times. It means investing with this sort of wealth might look elsewhere.

We support investors moving to New Zealand so if you would like to discuss further, please contact one of our team at stevenmoe@parryfield.com, rebeccanicholson@parryfield.com or yangsu@parryfield.com at Parry Field Lawyers.

The term ‘director’ usually refers to people formally appointed to a Board. However, some people who are not formally appointed may operate as ‘deemed directors’ or ‘shadow directors’. They are increasingly likely to be treated by the law in the same way as formally appointed directors.

Justice Millett in a well-known case said a ‘de facto’ director “… is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims are the only directors of the company to the exclusion of himself.”[1]

Justice Millett’s description is perhaps a little cynical. Some shadow directors may be trying to avoid the accountability that attaches overtly to appointed directors, while others may be quite open about the influence they have on directors and boards.

What does the Companies Act say? What matters is that de facto and shadow directors are captured in the Companies Act definition of ‘director’ as a person in accordance with who directors or instructions the board of the company may be required or is accustomed to act. This means that whether or not they regard themselves as directors, these ‘deemed directors’ may be held accountable as though they were directors for any breaches.

Who might this capture? Looking at the definition, whether or not a board is “required or accustomed to act” for a deemed director is a matter of fact. The court will look at any evidence that shows a pattern of behaviour that amounts to directors being “accustomed to acting” on a deemed director’s instruction.

One legal commentator has suggested that the statutory wording of “required to” might extend the accountability net to include people who can be shown to have exercised control over the board even without a pattern of behaviour,[2] although this has not yet been tested in court.

An example in practice could be a large shareholder who is not a director but who behind the scenes is directly what the Board does.

Key points to note:

Parliament implemented this definition intentionally. It makes sense that if deemed directors have been instrumental in action or inaction that breaches directors’ duties, they too should be held accountable; perhaps even more so if they did this to avoid attention and liability.
Boards often rely on the professional advice from lawyers or accountants. It is important that relationships with advisors are purely advisory in nature and that directors or boards are not controlled or directed by the advisors.
If you are a shadow director, or your company has a relationship likely to be deemed a shadow director, be aware of the implications. One question to ask might be whether or not shareholders are aware of the shadow director, and if not, why not. Should the person just be appointed?

[1] Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 Ch, at 183.

[2] Taylor Lynn “Expanding the pool of defendant directors in a corporate insolvency: the de facto directors, shadow directors and other categories of deemed directors” New Zealand Business Law Quarterly 16(2) Jun 2010:203.

Should you require assistance, please contact: Steven Moe stevenmoe@parryfield.com, Michael Belay michaelbelay@parryfield.com, Sophie Tremewan sophietremewan@parryfield.com or Yang Su yangsu@parryfield.com at Parry Field Lawyers.

Most people have heard of resolutions for companies, but at certain times the Companies Act 1993 (the Act) requires companies to issue certificates. We were recently asked what certificates are, when they need to be issued, and how certificates differ from resolutions. These are great questions and we answer them here so more people can have the information.

Both resolutions and certificates are important for appropriate decision-making, due process, and to ensure good governance.

What is a resolution?

In meetings (or via email if a decision is needed outside of a meeting), decision-makers will typically discuss something and make a decision. A resolution is the record of that decision. Resolutions must be recorded in the minutes. Schedule 3 of the Act provides a good overview of what is required for board meetings. It is common for company constitutions to include more detail and process around company meeting obligations.

When are resolutions needed?

It is advisable to record all important director decisions as resolutions. One important situation requiring a resolution or contingent on approval by special resolution is when a company wishes to enter into a major transaction. This might relate to the acquisition or disposition of assets the value of which is more than half the value of the company’s assets before the acquisition or disposition.

Resolutions are also needed in many other situations, including when adopting a constitution, deciding on the consideration for which shares will be issued, or deciding to exercise an option to redeem a share.

What is a certificate?

A certificate is more formal in nature than a resolution and sets out information which directors certify as being true. Certificates are only required in certain situations. Companies will make many more resolutions than they will issue certificates.

Certificates are typically required to be provided to the Companies Register where they will be publicly accessible. Anyone can do a search on an incorporated company. For example, a search of ‘documents’ for a large company will show many examples of certificates the company has provided to the registrar. The register promotes transparency and accountability, which is intended to help encourage good governance and discourage behaviour by directors that may harm shareholders.

When are certificates needed?

When certificates are required by the Act it is common that a resolution is needed first. For example, when directors are determining the consideration for the issue of shares they will vote and there will be a resolution. Only then are they able to sign a certificate and provide that to the Registrar.

Some other examples of when certificates are typically needed include:

When the board passes a resolution for the issue of options or convertible financial products, an offer to acquire shares, or for distributions to shareholders
When the company is amalgamating with another company
If the company has a listing agreement with a stock exchange, after the registration or a transfer of company shares
When a director is appointed or removed
If authorising a payment, benefit, loan, guarantee or contract to a director
If authorising liability insurance for directors or employees.

Consequences of not issuing certificates:

Fines of up to $5,000 apply for failure to comply with the obligations to provide certificates for shares or failure to sign a certificate of solvency when necessary
The company must keep a copy of all certificates for the last 7 years at its registered office
Shareholders and any authorised person are able to give notice in writing to view certificates.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. Please feel free to contact us at Parry Field Lawyers:

Steven Moe, Partner – stevenmoe@parryfield.com
Michael Belay, Solicitor – michaelbelay@parryfield.com
Sophie Tremewan, Solicitor – sophietremewan@parryfield.com
Yang Su,Law Clerk – yangsu@parryfield.com

Many people mistakenly believe it is best to register a company to operate as a self-employed contractor. In reality, what is ‘best’, depends on your circumstances. We get asked a lot about these options so let’s look at a common misconception.

Isn’t registering a company best for limiting liability?

We tend to encourage entrepreneurs to set up companies. Registering a company creates a separate legal entity which means the company rather than the owner becomes liable if things go wrong. If you deal with multiple creditors this legal separation might be useful. However, company structures do not protect in all situations. If the owners are also managing the company as directors, they are still exposed to certain duties and liabilities as managers. Having a company structure could allow you to get investors in more easily as well – we discuss that in this article.

If you have few creditors and low risk generally, the idea of limiting liability may not be potential reason enough to register a company. Instead, if you are a sole trader it may be prudent to insure yourself against other industry-specific risks that might attach to you, for example, by taking out Professional Indemnity and Public Liability Insurance.

What are the other options?

Company or sole trader structures will work best for many people. However, we recommend thinking about the future, and how your circumstances might change. If you are likely to end up employing people, dealing with multiple creditors and managing complex inventory, it might be best to register as a company from the outset.

There are numerous options other than companies and sole trading, which is why we developed this useful comparison and our Startups Legal Handbook. We look beyond the obvious when we provide advice. We would be pleased to help you tease out your circumstances in more detail to help determine the best legal structure for you.

Should you require assistance, please feel free to contact Steven Moe stevenmoe@parryfield.com, Michael Belay michaelbelay@parryfield.com, Sophie Tremewan sophietremewan@parryfield.com, Yang Su yangsu@parryfield.com at Parry Field Lawyers.

In New Zealand, directors may become liable for reckless trading (agreeing or causing or allowing 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) per the Companies Act, earlier than the point of unavoidable insolvency.

Interestingly, the Supreme Court of the United Kingdom ruled for the first time in October 2022 on what triggers the directors’ duty to have regard for creditors’ interests ahead of shareholders interests (that is the company). The case is BTI 2014 LLC v Sequana SA and others.

The appellants argued that the directors of an insolvent company should be liable to creditors for the amount of the dividend it had paid almost ten years before. Importantly, the company was neither insolvent nor on the verge of insolvency at the time of the dividend.

The appeal was dismissed based on the common law rule in the case, West Mercia. The rule effectively means that the fiduciary duty of directors to act in good faith in the interests of a company is widened when insolvency is imminent. It is only when insolvent liquidation or administration is unavoidable that the shareholders cease to have any interest in the company, and creditors’ interests become paramount.

The United Kingdom court rejected the idea that this can occur earlier, for example, when there is a ‘real and not remote risk’ of insolvency, per some Australian authorities.

In Sequana Lord Briggs’s comments that shareholder interests should remain more important than creditors up to this tipping point are persuasive, after all, liquidation may not happen and insolvency may be temporary.

Conclusion

Currently the United Kingdom view of when director obligations to creditors are triggered differs from New Zealand and Australia, being when insolvent liquidation or administration are unavoidable. The case is relevant because New Zealand courts often consider the outcomes of cases in other common law jurisdictions, such as the United Kingdom and Australia. The findings of this case may or may not influence New Zealand law in the future.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation.

Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

Advertising your fundraising effort

Your business is thriving and you need substantial additional capital to fund the next stage of your growth. You have read up on the Financial Markets Conduct Act 2013 (“FMCA”) (available here) and would prefer to raise funds through one of the Schedule 1 exemptions from product disclosure statement requirements (discussed here). Being proactive, you have already approached your close business associates, relatives, and employees while also taking full advantage of your statutory small offers limit, but it is still not enough.

You decide that it is time to widen the pool of potential investors – you need to reach the deeper financial resources of Wholesale Investors (discussed here) by advertising your offer to them. But how do you that and what are some of the risks in advertising to Wholesale Investors?

Inserting a Disclaimer

To begin with, it is important to be open and honest with the people who come across your offer that your investment is only open to Wholesale Investors. Doing so will avoid potential misunderstandings and hopefully prevent a flood of enquiries from people that will not qualify for the Wholesale Investor exemption. We have seen offers include a disclaimer similar to the one below to highlight that the offer is only available to Wholesale Investors:

“DISCLAIMER: [These] offers are only open to investors who fall within the exclusions applicable to offers made to “wholesale investors” as set out in Schedule 1, clauses 3 (2)(a)-(c) and 3 (3)(a)-(b)(ii) of the Financial Markets Conducts Act 2013 (FMCA). You can obtain further information on FMCA requirements, and whether you come within the exclusions and their requirements at [our website]”

Promotional Conduct

Making it clear that your offer is only open to Wholesale Investors is just the first step. You also need to ensure that your promotional efforts are not misleading or deceptive (see S19 of the FMCA). The recent case of Du Val Capital Partners Limited v Financial Markets Authority [2022] NZHC 1529 offers some key takeaways in respect of the S19 fair dealing requirements:

In assessing whether your offer may be misleading or deceptive, your target audience matters. In this regard, your choice of marketing channels is relevant: advertising your Wholesale Investor-restricted offer in social media and other online channels may be a factor in the Financial Markets Authority (“FMA”) determining that your offers were targeted at inexperienced investors.
You cannot assume that because your offer is restricted to Wholesale Investors, your advertising audience will be more experienced and knowledgeable. Wholesale Investors are not all inherently more sophisticated than non-Wholesale Investors.
If your promotional material is misleading, it cannot be saved by subsequently making more detailed materials available to investors.

Final Caution

The FMCA requires that an offeror know its target audience and engages with them openly and honestly. This includes ensuring that promotional materials are not misleading or deceptive. If you have any questions on fundraising, please feel free to reach out to us if you would like specific input on your context. We have helped many companies with their fundraising efforts and each situation is unique. You can contact Steven Moe stevenmoe@parryfield.com, Michael Belay michaelbelay@parryfield.com or Yang Su yangsu@parryfield.com at Parry Field Lawyers.

Introduction to the New Zealand Emissions Trading Scheme

Background and Operation of the New Zealand Emissions Trading Scheme

The New Zealand Emissions Trading Scheme (the “NZ ETS”) was introduced as a tool to combat climate change in Aotearoa New Zealand. It was created under a 2008 amendment to the Climate Change Response Act 2002 (the “Act”) with the purpose to help Aotearoa New Zealand meet its international greenhouse gas emissions obligations under the United Nations Framework Convention, the Kyoto Protocol and the Paris Agreement, and to meet its 2050 targets and emissions budgets.

The NZ ETS achieves its purpose by setting a requirement for businesses to measure their annual greenhouse gas emissions and report it to the Government. The NZ ETS broadly covers all of Aotearoa New Zealand’s emissions and includes the following sectors: forestry, agriculture, waste, synthetic gasses, industrial processes, liquid fossil fuels and stationary energy.

These sectors, excluding agriculture, also pay ‘the price for their emissions’ by having to acquire and then surrendering one New Zealand Unit (“NZUs”) to the Government for each one tonne of CO2 equivalent greenhouse gas they emit. The agriculture sector will be governed by a separate greenhouse gas levy system which will come into effect in 2025. Obligations under the NZ ETS are set high up the supply chain so consumers and smaller businesses are not directly caught by the NZ ETS obligations. Nevertheless, consumers do indirectly pay for emissions as the costs of NZUs are passed down the supply chain.

NZU’s

NZUs can enter the emission trading market in multiple ways. The Government controls two key methods by publicly auctioning NZUs and freely allocating NZUs to certain emissions-intensive and trade-exposed industries. The other main way that NZUs enter the emissions trading market is when participants in the NZ ETS ‘earn’ NZUs from the Government by growing forests and undertaking other activities that remove emissions. All NZUs can then be bought and sold between participants in the NZ ETS through the New Zealand Emissions Trading Register.

Non-Compliance with the NZ ETS

The Environment Protection Authority monitors compliance under the NZ ETS with strict liability offences resulting in fines for low-level non-compliance – please see here for a breakdown of fines. Prosecution is available where there is more serious non-compliance.

If you would like to know more about the statutory requirements for the New Zealand Emissions Trading Scheme, please do feel free to reach out to us.

The Limited Partnership regime was introduced fairly recently in New Zealand through the Limited Partnership Act 2008. As such, limited partnerships may not be as familiar to Kiwi entrepreneurs and founders. In this article, we highlight a few of the advantages and disadvantages of choosing a limited partnership for your business structure. In our view, they represent a relatively simple structure which can really be useful in the right situation.

What is a Limited Partnership?

Limited partnerships are a corporate structure that combine some key features of companies (such as separate legal personality) and partnerships (such as tax pass-through treatment). In a limited partnership, on entity is the general partner(s) who manage(s) the limited partnership (day to day running) while other investors are limited partners who act as silent partners (see diagram below).

This structure is often used by venture capitalists or fund managers as the corporate vehicle for investor partners to invest their funds. For more information on the basic requirements of a limited partnership, along with a comparison of other structures, please see here.

Why choose a Limited Partnership?

Positive	Comment
Liability is ring-fenced	A limited partnership is a separate legal entity, and limited partners’ liability is restricted to contributed capital
Effective practical and legal control	Only general partners may manage the affairs of the limited partnership
Tax pass-through treatment	Tax consequences of the limited partnership pass directly to the partners
Privacy	Identity of limited partners and contents of partnership agreement do not have to be publicised

Why wouldn’t I choose a Limited Partnership?

Drawback	Comment
General partner is jointly liable with the limited partnership for the liabilities of the limited partnership	Often addressed by choosing a limited liability company to act as general partner, providing liability ring-fencing
More involved set-up	All limited partnerships require a written partnership agreement
Investors negotiate their rights and obligations	E.g. Right to remove/appoint general partner(s), exit rights, pre-emptive rights
Financial Markets and Conducts Act 2013	A partnership interest in a limited partnership may be a financial product requiring FMCA compliance

We have helped many founders and companies structure their business and each situation is unique. If you think a limited partnership may be a suitable option for your business, feel free to reach out if you would like specific input on your context.

If you enjoyed this content then we also have a guide for people doing business in New Zealand which you can download for free here.

When is a charitable company the best option?

Background

Direct investments

A. Acceptable managed funds

B. Listed equities and philanthropy

Introduction to the New Zealand Emissions Trading Scheme

Background and Operation of the New Zealand Emissions Trading Scheme

NZU’s

Non-Compliance with the NZ ETS

Christchurch CBD

Christchurch

Rolleston

Hokitika