Business - Parry Field Lawyers

In this article I want to tell you some key points that I have learned about setting up an impact driven organisation in Aotearoa New Zealand. This applies whether that ends up with a charitable structure or a for profit structure or some form of hybrid. The reason that I know about this is my job is as a Partner at Parry Field Lawyers where I have a unique practise of law focusing on helping purpose driven people achieve their mission. Also, with more than 200 interviews for seeds (www.theseeds.nz) I have spoken with some of the best entrepreneurs in New Zealand and gained their perspectives.

So to download all this information to you I am going to share here about three things I think are key to know. I would be curious if you agree with me, and it might be that you know others who would appreciate the challenges because I am going to give it to you straight. I commonly go through these points – probably 2 or 3 times a week – with people who are wondering about setting something new up so this is also going to be a lot more efficient as I can get people to listen to it before speaking about the specifics of their situation.

• First, I will discuss the three key questions to ask before considering the detail of what structure is best.
• Second, we will look at three of the most commonly used legal structures for impact driven people.
• Third, some reflections on the way to enshrine impact within those structures and the key things needed.

So let’s turn to the high level questions you need to get right from the beginning. Don’t skip over this part…

Part 1: The Three High Level Questions to ask first

What is your purpose?

The first thing to remember is that the purpose and mission needs to come first. What is it that you really want to do? The detail of what legal vehicle to choose then becomes a secondary consideration that is about how you best fulfil your purpose. I encourage you to clearly articulate your mission and your purpose because that will drive all other decisions. This is the “power of why” and will be what you come back to when things get blurry and you wonder why you started on this journey. Also I want to know what that is in just 30 seconds – not the 5 page version, just the three short bullet point version. If you can reduce it down to that then you will be able to convey it clearly to others as well.

So why is getting the purpose important?

The purpose is the first key consideration. Why? Well I like to think of it like this – if you go buy a car there are many options. You might want to get an off road 4×4, or a convertible, or a 7 seater – there are a range of vehicles that depend on what your purpose is. In the same way when choosing a legal vehicle we need to understand the purpose of what you want to do. Think of a limited liability company as one type of special purpose vehicle, the same with cooperatives, incorporated societies or charitable trusts. So we need to know the direction you want to head in order to decide on the right vehicle.

What fuel is driving the vehicle?

The second key consideration comes from Jerry Maguire and the phrase “Show me the Money!”. Money is like the fuel that is needed for the vehicle to run – whatever type is chosen. There are two parts to this which affect the decision. Where is the money coming from – sales of product or services, private investment by issuing shares, loans, donations or grant funding? And also, where is the money going to – will there be private profits for individuals or will the funds be reinvested back to promote the mission? All of these factors are critical to work out what structure is best.

Replication?

The third question is a bit different. But before we get into the legal structure options I think it is important to ask this: Is there someone out there already doing what you plan to do? We see in New Zealand a lot of replication where people want to do good and assume that to do so a new initiative is needed. I don’t think that is always the case. If the mission and purpose is most important then strip away any ego associated with founding something new and ask the hard question: for the good of the cause am I better to come in as a strong supporter and work with others already doing the mahi? This may sound like a strange thing to be proposing since my job is to act for people setting something up so I am doing myself a disservice by advocating this thinking – instead I could fan the flames of starting something new. But there is a bigger picture here and if I can encourage one person to not start something new and instead come in as a big advocate and supporter of a struggling initiative that just needs some volunteers then that will be better overall. So please do look around and have conversations about collaboration before going off and setting up something new.

Part 2: The three best types of legal structures to consider

There are many possible structures but I am going focus in on the ones I think are the simplest and easiest ones. There are basically three options. They are:

Set up a Company: This is a commonly understood vehicle for running a new initiative. As a positive you can privately benefit through dividend return to shareholders, you can more easily access investors by issuing them shares, people understand the structure over other options. The key ingredients are a director, a name and a shareholder. The downside is that you will be less likely to get grant funding or donations, people make assumptions that what you do is driven by profit rather than purpose, so there can be a lot of explaining needed, and if taken over the company might lose the essence of why it was originally founded. I am setting up many impact driven companies so am happy to discuss all this in more detail if anyone would like to know more.

Set up a Charity: Setting up a charity provides a nice vehicle because you are forced to write down you purposes – I think that is a good thing. You need to fulfil one of four charitable purposes: Advancing education, reducing poverty, advancing religion or purposes beneficial to the community. So just because what you want to do is “good” doesn’t necessarily mean that it will be charitable. Becoming a charity results in significant tax benefits because you are helping society – for example, you can issue tax deductible receipts to donors. However you will not be able to privately benefit (apart from market rate salaries), will not be able to issue shares that return dividends to shareholders (unless to another charity) and will have difficulty raising capital funding. One common misconception is that a charity must be a Trust – in fact, companies can be charitable as well it is just that they must clearly articulate that there is no private benefit and state what the purposes are. I am setting up several charities each month across the full range – recent examples include an ocean focussed charity, one setting up Buddhist temples, one working with children on design thinking – a very large range.

Hybrid option: Remember the “show me the money” point earlier? Well this is where it kicks in – if funding is coming from private investors, this option is preferred over a charity. Whereas if funding is likely from grants or donations, then the charity option may be preferred. There is no one template that will apply for all. While it involves some duplication of having two entities, sometimes what I see people end up considering is a hybrid option. This involves having a company while also setting up a Foundation which is a charity. How closely aligned they are will depend on the circumstances. If setting up a charity then part of the thing to consider is having independence in that charity so there is no chance of a conflict of interest. Ultimately this is all about finding the best way to have maximum impact. Increasingly I am seeing pull from either end – private companies wanting to give back through creating a charity, while charities are looking to commercialise some aspect of what they do in order to generate another income stream. I think the lines will continue to blur as we increasingly move towards discussions of impact being the most important thing. Like I said at the start it then is down to the detail as to the type of legal structure used as the overarching point is that mission and purpose and impact are being implemented.

Part three: Enshrining impact

I want to finish off with a few thoughts about how we started – a focus on impact. Thinking about each of the structures discussed I would just comment that for a charity you are required to set out the purpose you want to achieve, which I think is a really good thing.

For a company, it is not legally required to set out what your mission is – which I think is an oversight that one day will be corrected – but it is possible to enshrine your impact by setting out your mission in a constitution. That is a public facing document and if I get involved I try to have clients articulate their mission and purpose right at the start so that they are open and clear with the world about what they are there for.

I would encourage you that whatever entity type you end up choosing that you really come back to the mission and purpose and clearly set out what it is. I can guarantee that will be the most valuable point to get straight. Once that is done then it will help you to decide on the detail of which type of entity to choose. You may notice that this summary focusses more on the high level questions than the detail – that is on purpose.

My final thought is to consider how you report on impact – wouldn’t it be great if we all started measuring and talking about impact in ways that get beyond financial metrics. It is really hard to do but research it and get amongst it to lead the way in how you measure and talk about the impact you are having. If you can do that then I am confident your venture will be more assured of success.
I’ve enjoyed reflecting on this topic and would be happy to discuss further with you – and if I directed you here to listen before we have a phone call then I look forward to chatting sometime soon.
Until next time.

Note: This is a short overview of issues – inevitably situations will be different for each context and you need to consider a variety of issues such as Financial Markets Authority rules, Tax considerations, employment, shareholder dynamics, among many other things. But the point of this is to provide some high level thoughts to get you started.

Steven Moe is a Partner at Parry Field Lawyers with 20 years experience and a focus on empowering impact

Steven can be contacted on:
E stevenmoe@parryfield.com
T +64 21 761 292

On 30 June 2020, the long-awaited Privacy Bill received Royal Assent, with the changes coming into effect on 1 December 2020.

Privacy Commissioner John Edwards has said “The new Privacy Act provides a modernised framework to better protect New Zealanders’ privacy rights in today’s environment.”

Some of the key changes include:

• All agencies will be required to report serious privacy breaches to the Office of the Privacy Commissioner. If the breach is likely to cause serious harm, the people affected must also be informed. This is consistent with international best practice.

• If an agency uses service providers based outside New Zealand, they will need to make sure the providers meet New Zealand privacy laws.

• Criminal offences will be introduced. An agency could be fined up to $10,000 for misleading an agency about someone’s personal information and/or intentionally destroying requested personal information.

• The Privacy Commissioner will have the power to make binding decisions when someone requests access to their personal information. These decisions may be appealed to the Human Rights Tribunal.

• International digital platforms that obtain New Zealanders’ personal information through business in New Zealand must comply with New Zealand privacy law, regardless of where the servers are based.

• The Privacy Commissioner will have the power to issue compliance notices. Non-compliance with the notice could result in a fine of up to $10,000.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. If you think your privacy policy is insufficient (or non-existent!), we would strongly encourage you to get in touch with us. Contact Steven Moe at StevenMoe@parryfield.com

If a former Prime Minister of New Zealand is involved in a case then you know it is going to attract interest. Dame Jenny Shipley was the Chair of the Board of Mainzeal and it was found that the directors had breached their duties – what happened, and most important, what can we learn from this?

As a director of a company you must act honestly, in the best interests of the company, and with reasonable care at all times. You must not act or agree to the company acting in a manner that is likely to breach the Companies Act 1993, other legislation or your company’s constitution. The outcome of the Mainzeal case comes as a timely reminder to company directors of their duties and obligations.

Founded in 1968, Mainzeal was one of the leading construction companies in New Zealand, responsible for projects such as the ASB Sports Centre in Wellington and Spark Arena in Auckland, just to name a few. However, the construction industry was sent into shock when Mainzeal collapsed and was placed into liquidation in February 2013. Unbeknown to many, Mainzeal had been struggling financially for a number of years. So much so, that Mainzeal’s liquidators brought proceedings against the former Mainzeal directors, claiming they had breached their duties under section 135 of the Companies Act 1993.

What Happened?

The details are summarised at the start of the case: “In 1995, an investment consortium with a focus on investments in China acquired a majority shareholding in Mainzeal’s then holding company. This investment consortium was associated with the first defendant, Mr Richard Yan. The company group came to be known as the Richina Pacific group. In 2004, the group established a new independent board for Mainzeal with the third defendant, Rt Hon Dame Jennifer Shipley, as Chairperson. It operated for nearly 10 years under this board until the company collapsed in February 2013. Its collapse left a deficiency on liquidation to unsecured creditors of approximately $110 million. The unpaid creditors were sub-contractors ($45.4 million), construction contract claimants ($43.8 million), employees not covered by statutory preferences ($12 million), and other general creditors ($9.5 million). Mainzeal’s secured creditor, BNZ, was fully paid out.”

Were the directors reckless?

The crux of the claim came under section 135 of the Companies Act . This section specifies that a director of a company must not—

agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
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.

Ultimately, the court had to consider if Mainzeal’s directors had been reckless in continuing to trade while Mainzeal’s balance sheet was in deficit, thus placing the company’s creditors at a substantial risk of serious loss?

Mainzeal had been trading as insolvent from as early as 2005, when Richina Pacific group extracted considerable funds from Mainzeal by the way of loans for investment in China. However, Mainzeal continued to operate as a going concern, as Richina Pacific provided letters of support for when Mainzeal’s accounts were audited. The directors were also given assurances by email and in meetings that support would be provided by the parent group if it was needed. These representations of financial support were relied on by the directors – but they should have done more. It is important to note that the promise to provide financial support when necessary was never formalised or legally binding (eg loan agreements or guarantees).

The ability for Richina Pacific to provide financial assistance when needed was also limited due to stringent foreign exchange controls exercised by the Chinese governmental authorities. Therefore, this made it extremely difficult to take money back out in China, once it had been taken from Mainzeal.

Mainzeal continued to trade, largely relying on funds that were owed to sub-contractors. It must have been a difficult balancing act to work out how long to continue trading in those difficult circumstances. Ultimately, Mainzeal was unable to pay its debts and was placed into liquidation on 28 February 2013.

Looking at the case there are some fascinating exchanges by email between the Directors and representatives of the parent company. For example, Dame Jenny Shipley wrote:

“While I note your desire to run a central treasury function for the NZ interests it is unreasonable to ask Mainzeal Directors to approve the associated related party transfers without the clear understanding if we are liable for these decisions and the associated obligation or of other persons or Directors are legally responsible. We are not informed as to the purpose of these transfers and would not need to be so if we had a clear indication from those responsible for the group that the request had been approved…”

So the directors were asking some questions – which is always good. But they relied too much on answers like this one that came in reply to these comments above:

“Again, there are no independence issues here as it is ultimately the shareholders who are on the hook for everything. Mainzeal is no in way compromised and Richina has always supported it to the full extent even during its more dire situations…”

Another experienced director, Sir Paul Collins, wrote: “I would have to say I’m at my wits end. I joined the board under the impression Mainzeal was solvent … I accepted all your representations re support and more recently redomiciling in NZ later this year and taking out the BNZ. As you will well appreciate I have dealt with a lot of bad news stories over the years and have found that matters can be worked through when you have all the cards on the table. I don’t have that confidence here. …”

What should the directors have been doing? Asking questions – like they did. What they failed to do was getting the answers documented in binding legal agreements.

The court found that the directors had breached their duties under section 135:

“Whilst all the factors I address below are relevant, there are three key considerations that cumulatively lead me to conclude the duties in s 135 were breached:

Mainzeal was trading while balance sheet insolvent because the intercompany debt was not in reality recoverable.

(b) There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.

Mainzeal’s financial trading performance was generally poor and prone to significant one-off loses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.”

It was held that those were the three key elements in establishing that there had been a breach by the directors. The Court then went on to confirm:

“The policy of trading while insolvent is the source of the directors’ breach of duties, however, such a policy would not have been fatal if Mainzeal had either a strong financial trading position or reliable group support. It had neither.”

As the directors had been found in breach of section 135, the court awarded $36 million in damages. A large sum of money for anyone. The Court found that three directors, Dame Jenny Shipley, Mr Peter Gomm and Mr Clive Tilby had acted honestly and in good faith, therefore each were held liable for up to $6 million jointly with Mr Yan.

This did not go unchallenged. The court left the door open for the parties, if they believed there had been a miscalculation in the amount of damages awarded. Both the liquidators and former directors believed there had been, however both parties had their cases dismissed. An appeal and cross-appeal were filed by the liquidators and former directors.

In 2021 the Court of Appeal found that the directors had breached s 135 of the Act, which exposed the company’s creditors to a substantial risk of serious loss. However, that loss did not materialise and the court therefore no compensation should be payable by the directors.

The court also found the directors had breached s 136 of the Act when they entered into four significant construction contracts. The matter was remitted to the High Court to determine the compensation payable. The former directors are seeking to overturn the decision and the matter is currently before the Supreme Court.

What can we learn: What should the directors have done?

There were a number of red flags for the directors throughout the years. With the benefit of hindsight, there are some important lessons that can be taken from this case:

It’s really simple, but ask questions. Understand the answers and document them well. If someone says there is support, get it in writing.
If you are questioning the information you are receiving from others or it makes you feel uncomfortable, seek independent advice from a professional.
When relying on assurances from others, ensure these are in writing and legally binding.
Understand your duties as director. Ensure it is clear to whom your legal duties lie with. This is particularly important if your company is part of group of companies.
If you are facing financial difficulty, continue to review the situation and be extra-vigilant.
If you have been provided of assurances of financial support, ensure such assurances are clear – ask questions.

Examples of questions could include: How much financial support is available? Are the finances readily available and if not, how long will it take? What are the barriers that need to be overcome? How can we ensure we can legally rely on these assurances?

A recent United Kingdom case of interest

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.

Conclusion

The final outcome of Mainzeal is outstanding. However, what can be taken away from this case is the importance of the obligations and duties directors have to a company and creditors. The case really emphasised the care that is required, especially if a company is in financial difficulty. It also highlighted, if ever in doubt, seek independent advice, as it is better to be safe than sorry. Also, ask questions and document the answers so there is a clear trail.

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.

The role of the Notary Public in New Zealand could not be better described than as follows:

A notary public (sometimes called a notary or a public notary) in New Zealand is a lawyer authorised by the Archbishop of Canterbury in England to officially witness signatures on legal documents, collect sworn statements, administer oaths and certify the authenticity of legal documents usually for use overseas.

More information can be found on the New Zealand Society of Notaries website.

The primary task of a Notary Public in New Zealand is therefore to “officially witness signatures on legal documents … ”. Best practice has in the past demanded a physical appearance by the person before a Notary Public witnessing the signing of a legal document. The appearer (“applicant”) must also identify themselves to the Notary, providing evidence by documents and circumstances sufficient to satisfy the Notary that the applicant is who she/he claims to be. Such evidence has been demanded by notaries since 2750 BC.

Witnessing Signatures : Identification: The Problem of Fraud

To officially witness signatures and identify people who appear before you may at first sight appear to be a simple task. However things are not always simple. The person appearing before a Notary may not be who they appear to be, even in New Zealand.

They called him “The Doctor”. Based in Bangkok, for years hunted the man “revered among Bangkok’s criminal underworld for producing the most sophisticated forged travel documents on the market for just $2,000-$3,000.” Hidden in a secret compartment were 173 passports from France, Israel, New Zealand, Iran and Syria, and a cache of electronic chips, moulds for visa stamps, ribbons, inks and specialist printing equipment.

Therefore the Notary will take care to identify the person appearing before her or him, by asking for several forms of identification, and scrutinising documents in great detail, even to the point of using a magnifying glass or UV light. One flaw to look for is a slight shadow at the edge of the photograph, which may not be ascertainable on a valid passport.

In Australia documents establishing identity for notarial purposes have been attributed points, with Passports, Citizenship Certificates, and Firearm Licences at the higher end 70 points, Rates Notices and Utility Accounts at 20 points, and Motoring Association Cards and Taxation Assessment Notices at 10 points.

Ken Lord at Parry Field Lawyers is a Notary Public and would be delighted to assist with your witnessing requirements. Please contact our office on 03 348 8480 to organise a meeting with him.

Are physical signatures necessary when executing legal documents?

Not always. The rules are found in the Contract and Commercial Law Act 2017 (CCLA). The core principle is that a signature must be RELIABLE in order to have any legal effect. In determining whether the signature you have provided is reliable, the questions are:

Does the signature adequately identify you?
Does it indicate your approval of the information in the document?
Given the nature of the transaction, is the means by which your signature was provided (physical or electronic) appropriate?

An electronic method must satisfy the first two aspects above in order to be recognised as an “electronic signature” in New Zealand. Generally, an electronic signature is presumed to be reliable provided:

1. The means of creating the electronic signature is:

(a) linked only to the signatory;

(b) under the control of the signatory alone; and

2. Any alterations to either the signature or the information in the document, is detectable.

However, this presumption may be overturned if the electronic signature is held not to be ‘as reliable as is appropriate’ given the purpose and circumstances in which the signature is being required. This is very much a fact-specific determination that will depend on the context of each situation. It is suggested that the following factors be considered:

the size of the transaction (i.e. the level of risk e.g. documents involving large sums);
how often you transact with the other party concerned; and
whether the other party (and yourself) often enters into the sort of agreement represented by the document.

Practical examples of these principles

Below are some case law examples that help illustrate the standard:

Wilfred v Lexington Legal Ltd

An electronic signature (in the form of an email from a client to their lawyer signing “best regards — Harmon”) sufficed as being a reliable for the purposes of entering into a contract for legal services.

Company Net Ltd v Registrar of Companies

Original signatures were required by the Registrar of Companies in relation to company incorporation documents — albeit in this case, there were issues of identifiability that caused concern. The companies office makes clear that they do accept electronic signatures for most documents.

See: https://companies-register.companiesoffice.govt.nz/help-centre/managing-your-online-account/filing-documents-with-electronic-signatures/

Welsh v Gatchell

Agreements for sale and purchases of land can be signed electronically. Notice to the other party about electronic signatures is already provided in the standard terms of the Auckland District Law Society document which is commonly used for these types of transactions.

Consequently, although electronic signatures will generally be considered reliable, where there is a lot riding on a particular document (i.e. a sizeable transaction as opposed to a mere box ticking activity), it appears prudent to require physical signatures. Where physical signatures pose significant inconvenience and you wish to sign electronically, we advise that you give express notice to the other party that an electronic signature will bind all parties to the contents of the document, and that you expressly specify the form of electronic signature required.

What documents can be signed electronically?

As noted above, documents can be signed electronically as long as the signatory is identifiable and the signature is reliable. However, there are two main caveats to this:

Legal Requirement

Where there is a legal requirement on you to give information to a person (thus requiring your signature), you must obtain that person’s consent to receiving the information through means of electronic signature.

Documents of Integrity

Electronic signatures have no effect on documents that concern “matters of integrity” such as:

Documents relating to citizenship, elections, fish and game, civil aviation, corrections, credit contracts and consumer finance, disabled persons community welfare, fisheries, medicine regulations, misuse of drugs, passports, and court procedural documents;
Documents that relate to affidavits, statutory declarations, documents given on oath or affirmation;
Powers of attorney and enduring powers of attorney, Wills, codicils and the like;
Negotiable instruments;
Bills of lading;
Warrants to enter, search or seize; and
Fair Trading Act 1986 provisions in relation to consumer standards information on goods or services, and products or safety standards.

Is it sufficient to provide electronic pdf versions of the signed documents or are originals always required?

The inclusion of a counterparts clause in documents allows parties to exchange pdf copies of signed agreements through email or fax. The party last to sign the document effects a binding contract upon their provision of the signed document to the other party/parties. It is common practice for physical signatures to be exchanged in this manner i.e. physical signature presented in electronic form/through electronic means will suffice.

The absence of a counterparts clause in the document itself however means that wet-ink physical signatures will be required. A signature may be deemed unreliable where it is performed in a manner that wasn’t agreed to between the parties as evidenced in the document.

Provision of the originally signed documents is also required when executing deeds. Section 10 of the Property Law Act 2007 requires a signed deed to be delivered in order to take effect. Delivery is commonly understood as being the physical handing over of documents either in person or through post. If the intention is to effect delivery otherwise, we advise that this be made clear in the document itself by recording that the deed shall be deemed delivered upon transmission of a scanned copy of the original executed document by one party to the other.

The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.

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.

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.
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.

Before applying to register your mark, you should always search the trade marks register (here) for existing trade marks. If your mark is “confusingly similar” to an existing trade mark that provides similar goods or services, you will be unable to register your mark. New Zealand case law[1] sets out three questions to determine whether your mark is confusingly similar to another person’s trade mark:

Is your proposed mark in respect of the same or similar goods or services covered by any of the other person’s trade mark registrations?
If so, is your proposed mark similar to any of the other person’s trade mark registrations for the same or similar goods identified in question one?
If so, is the use of your proposed mark likely to deceive or confuse?

Step one: Similarity of goods and services

When registering to protect your mark, Intellectual Property Office NZ (IPONZ) requires each mark to be registered within one or more goods or services specifications. If your mark is similar to a registered trade mark, but relates to a completely different type of goods or services, IPONZ may allow it to be registered. Instead of applying a strict test, IPONZ carries out a broad comparison of the goods or services each mark covers. Helpful factors include comparing the uses, users and physical nature of the goods or services. Comparing how the goods or services reach the market and asking whether the goods or services covered by the respective marks are competitive may also be taken into account.

Step two: Comparison of marks

To determine whether the marks are similar, there are five basic guidelines:[2]

compare the marks as a whole and consider the overall impressions they give;
compare the ideas that the marks convey;
consider how “imperfect recollection” may contribute to confusion;
compare the look and sound of the marks (where appropriate); and
compare the trade channels of the goods or services.

Step three: Likely to deceive or confuse

IPONZ describes the test as whether there is a, “reasonable likelihood of deception or confusion among a substantial number of persons,” if the applicant uses their mark for any of the goods or services covered by registration. This requires a broad examination of all the relevant factors. However, three points they take into account are:

the visual, aural and conceptual similarities between the marks;
the distinctiveness of the proposed mark. If the proposed mark is generally quite distinctive, yet it looks similar to an already registered mark, there is a higher risk that the public will be confused;
the degree of similarity between the goods and services.

If IPONZ believes people will get confused between the proposed mark and the registered mark, then they will decline the application for registration.

Should you need any assistance with these, or with any other Commercial matters, please contact Steven Moe (stevenmoe@parryfield.com) or Kris Morrison (krismorrison@parryfield.com) at Parry Field Lawyers (03 348 8480).

For a more general overview of registering a trade mark, please see this article here.

[1] NV Sumatra Tobacco Trading Co v New Zealand Milk Brands Ltd [2011] NZCA 264.

[2] IPONZ Practice Guidelines: Guideline 10 “Relative grounds- Identical or similar trade marks” (16 November 2009).

New Zealand’s Companies Act 1993 and common law impose duties and liabilities on the directors of a company.

Who is a director?

Many of the following duties are not limited to those actually on the board of directors. A director can also include “shadow directors” who instruct the directors how to act, and persons who exercise powers of the board by delegation.

Who are duties owed to?

In general, these duties are owed directly to the company, giving it (and not individual shareholders or creditors) the right to sue a director for breach of duty. However, there do exist a number of provisions by which shareholders and creditors may pursue directors – these will be examined at the end of this article.

1. Duty to Act in Good Faith and in the Best Interests of the Company (s131)

Good Faith

Good faith implies acting with a proper motive – without any malice or dishonesty. It also means avoiding acts which promote a director’s own interests at the expense of the company’s (historically termed “conflicts of interest”).

Acting in the best interests of the company

This is a subjective test – that is, directors must only act in what they perceive to be the best interests of the company – not what an “ordinary” or “reasonable” director might do. This gives directors a certain amount of discretion to use their own business judgment, without fear of every decision being open to scrutiny. Although, the Courts may find section 131 has been breached when a director does not take into account the company’s interests before acting.

Exceptions to best interests rule

If the company is a joint venture company or a wholly (i.e. 100%) owned subsidiary of a parent company, a director may act in the best interests of his or her appointing shareholder or parent company – even if this is not in the company’s best interests. This recognises that these are unique entities – whose operation depends on directors having liberty to carry out the wishes of their (often conflicting) shareholders.

Strait-jacketed?

Given the duty to avoid conflicts of interest, can directors have any interest in a transaction or use any information gained by virtue of their position? The short answer is “yes” – provided they are willing to jump through the fairly arduous hoops of disclosure imposed by the 1993 Act – these will be discussed shortly.

Our advice: Don’t get too comfortable with the notion that as long as you believe a decision is in the best interests of the company, you’ll be fine. If your decision is one which any director with any appreciation of fiduciary responsibilities would see as being inconceivable, it is likely a Court would view this as a breach of section 131 – despite its subjective appearance. There is also an independent duty on directors to exercise reasonable care and skill – read on ….

2. Duty to Exercise Powers for a Proper Purpose (s133)

At its simplest, this duty could be said to cover the situation where a director strays beyond the limitations intended for their office and acts out of an ulterior motive. Unfortunately, it seems impossible to define in advance exactly what situations fall within this definition. It may be that it is not until a Court reviews the exercise of a power that it can be determined whether or not that power was exercised for a proper purpose. Often the Courts consider whether section 131 has been breached and then rely on that rationale to determine that the director has also breached section 133. Some examples from case law include where a director has acted for personal purposes, has withdrawn funds to the company and Inland Revenue’s detriment, or has engaged in a Ponzi scheme.

Our advice: Be aware that this duty is not related to the duty to act in good faith – that is, a director could act in what he or she thought was the best interests of the company, but still be acting for an improper purpose. A clear example of this would be the directors issuing shares solely for the purpose of diluting a particular (and probably troublesome) shareholder’s shareholding. While this may be in the best interests of the company as a whole (and even applauded by the other shareholders), it will nevertheless be an improper motive for issuing shares.

3. Duty to Comply with Companies Act 1993 and Company Constitution (s134)

It is obvious that by not complying with the Act or the Company Constitution, a director would be acting outside of his or her mandate.

But wait, there’s more …

However, this duty may be more onerous than it first appears. The Act imposes numerous responsibilities on directors, of which failure to discharge may result in criminal liability (discussed later). For example, under section 87(1), a share register must be maintained by the company. Failure to do this would mean that the Act is not being complied with and, for a director, would be a breach of the section 134 duty. This breach will be actionable by the company as against the director, which means that not only does so simple an omission as failure to maintain a share register constitute a criminal offence, it exposes directors to potential civil liability for breach of section 134.

And more …?

Our advice: Make sure you are also aware of obligations under other statutes, such as the Privacy Act, Health & Safety in Employment Act and Resource Management Act… – because if you cause the company to act in contravention of any statute, this would almost certainly amount to acting for an improper purpose or not acting in the best interests of the company.

4. Reckless Trading (s135)

Don’t be so reckless …

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. It is not designed to curtail the directors’ ability to take risks – as long as the company is able to bear the loss from complete failure.

Objective Test

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?”

Arise from your slumber

The situation of a director who “allows” reckless trading may include the “sleeping director” who has little or no actual knowledge of the company business, but is content to abdicate his or her responsibilities to more active members of the board. This can be especially relevant where spouses are each directors of a company, but only one works in the business.

Our advice: Make sure you have a sound knowledge of goings on no matter what your level of involvement in the company. If you miss a board meeting, make sure you find out what happened from another director – even obtain a copy of the minutes to ensure no major decision was made – which you might have “allowed” by your absence.

5. Duty in relation to Obligations (s136)

A director must not agree to the company incurring an obligation unless he or she believes on reasonable grounds when the obligation is incurred that the company will be able to perform the obligation when required to do so.

This will apply to such transactions as the company giving a guarantee.

Cramping their style?

It has been suggested that this duty will prevent directors taking commercial risks. However, as long as the directors’ decision is based on reasonable inquiries, research or information, it is less likely to be scrutinised later.

Our advice: When making a decision of this kind, the board should leave a “paper trail” – detailing not only their decision, but also their reasons. Better still, obtain professional advice. This will go toward showing that you acted on “reasonable grounds”. Also, do your homework early on – note the test is applied “at the time the obligation is incurred” – that is, when the transaction is entered into.

6. Director’s Duty of Care & Skill (s137)

The Test

Directors are required, when exercising powers or performing duties, to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances, 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.

Therefore, it seems each director is judged on his or her role in each decision made. If a director is appointed to a specific task, he or she may be liable if they do not bring the required skills to that task. However, it appears that a director is not ordinarily supposed to have special skills – so there may be differing levels of skill and care expected from executive and non-executive directors (but note that any difference between these directors applies to this duty only).

Don’t go down these roads …

Examples of the Courts finding directors to have breached this duty include:

where they acted before becoming fully acquainted with the company’s affairs.
where loans were made to a company connected to a director with no possible benefit to the company.
where cheques were signed in blank and the conduct of the business left entirely to another director.
where directors unquestionably trusted (subsequently dishonest) employees with the management of the company.

A Higher Standard?

Many people believe that this duty places a greater burden and more stringent standard of care on directors than was previously the case. At the very least, it would seem that shareholders’ greater awareness of a statutory duty of care on directors will lead to higher expectations and increased vigilance of directors’ actions.

Our advice: It is vital to understand that it is no longer acceptable to sit back and let others run the show. It is clearly established that even directors who are scarcely involved in management of the company can still be held liable when financial difficulties arise. Evaluate your position as a director – are you familiar with the ins and outs of the business? Do you read (and understand) the financial accounts? Do you attend board meetings? Do you have a hand in business decision-making? If the answer to these is generally “No”, it may well be that you shouldn’t be a director at all!

7. Use of Information and Advice (s138)

Relief from Omniscience?

In today’s commercial environment, directors cannot be expected to know everything about their company, or possess all the skills necessary for business decision making (although based on the foregoing, you could be forgiven for thinking otherwise!) Section 138 provides a (limited) form of relief for directors. It entitles directors, in the course of decision making, to rely upon reports, statements and financial data, as well as professional/expert advice given to them by:

an employee of the company who is believed by the director (reasonably) to be reliable and competent in the matters concerned – this could be another director.
a professional adviser/expert on matters within their competence.
another director or committee of directors regarding a specific area of designated authority.

There is a catch: In doing so, directors must act in good faith, make proper inquiry where the circumstances indicate a need for this, and have no knowledge that their reliance on the information is unreasonable.

Our advice: Again, documentation of decisions is the key – whenever you rely on someone else’s advice, record that fact. And don’t just blindly rely on others – as a director, you should be capable of reaching a reasonably informed opinion of the company’s financial capacity. If there are grounds for suspicion arising from another’s advice – act appropriately.

8. Director’s Interests (ss139-144)

Traditionally, if a director had an interest in a contract made with the company, he or she had to account to the company for any profits they might make (unless the company’s Articles or shareholders permitted otherwise). This was seen as a unduly harsh rule, and has now given way to a more permissive – but also more controlled – regime under the disclosure provisions of the Companies Act 1993.

Cards on the Table

Where a director has (or may obtain) a direct or indirect financial benefit in a transaction, he or she must disclose their interest in the transaction as soon as they become aware of it.

Disclosure is made by way of entry in the “interests register”, which must be kept by the Company. Disclosure is also required to be made to the board.

Avoidance by the Company

A transaction in which a director is interested may be avoided by the company any time within three months after the transaction is disclosed to the shareholders (whether by annual report or otherwise) – unless it is proved that the transaction is for fair value.

Our advice: Err on the side of excess when it comes to disclosure. While failure to disclose an interest in the register doesn’t affect the transaction’s validity, it could open you up to a $10,000 fine or an action from shareholders for breach of duty.

Also, disclose interests to the shareholders early – don’t leave it until the annual report – this could be months away and extend the timeframe in which the transaction can be overturned by the company.

9. Use of Company Information (s.145)

Pssst! …… (Don’t) Pass it on!

As with director’s interests, directors have traditionally been prohibited from using company property (including confidential information and trade secrets) for their own purposes. However, once again this blanket prohibition seems to have been abandoned in favour of regulating the use of information by directors.

Section 145 of the Act provides that a director who possesses confidential information must not disclose that information to any person, nor make use of it or act on it, subject to the following exceptions:

If disclosure is made solely for company purposes.
If disclosure is required by law.
If:

(a) the director has entered particulars of the disclosure in the interests register; and

(b) the board has authorised the director to make disclosure; and

If disclosure is made by a nominee director to his or her appointer, provided this is not prohibited by the Board.

What is confidential information? It could be anything, but definitely includes trade secrets, technical know-how, lists of customers, internal financial reports, feasibility studies, and specific information concerning ongoing transactions between the company and its clients.

It is important to note that the section does not directly cover the use of company information by a former director. Here, the company would probably need to rely on the common law relating to breach of confidence.

Our advice: While section 145 would seem to provide reasonable protection, if your company’s operation is such that directors are often privy to large amounts of confidential information and/or have outside interests in similar spheres, it may be prudent to have the directors sign a confidentiality/restraint of trade agreement which expressly binds them during and beyond their term of office.

10. Further Liability

While the above synopsis sets out the primary duties a director must uphold (which, in essence, place the quality and integrity of their decisions under the spotlight), liability for breach of these duties is by no means the only way a director can be called to account. What follows is a whistle-stop tour (or steeple-chase) of further provisions contained in the Companies Act 1993 which could cause a director to stumble:

A director owes duties directly to shareholders to supervise the share register, disclose interests in contracts with the company (as discussed above), and disclose any interest they have in share dealings. A breach of these duties entitles a shareholder to bring a personal action against a director (s169).
A shareholder could also bring an action to either restrain a director from acting in a manner which breaches the Act or the company constitution (s164), or to force them to act in accordance with these (s170).
Directors may be personally liable if a distribution is made to shareholders when the company is insolvent – to the extent that the distribution is not able to be recovered from the shareholders (s56).
Directors may be personally liable to liquidators or creditors for the debts of the company if they participate in the management of a company when they have been disqualified (by the Court or the Registrar) from doing so (ss384,386).
Directors may be liable to the company if they receive an unauthorised payment or have unauthorised insurance effected – to the extent they are unable to prove these are fair to the company (ss161,162).
If, on the liquidation of the company, it appears to the Court that a director has misapplied company money or property, or has been guilty of negligence, default or breach of trust, he or she may be liable to repay or restore the money or property, or contribute an amount to the assets of the company by way of compensation (s301).
Note that a creditor is entitled to apply for an order under this section and could allege breach of any duty as grounds for an order that money or property be paid directly to the creditor. If a company is in liquidation and the failure by the company to keep proper accounting records has contributed to its inability to pay its debts or impedes an orderly liquidation, a Court can order that any directors or former directors are personally responsible for all or any part of the debts of the company – unless they can show they took reasonable steps to ensure compliance (s300).
Criminal Liability: There are over 100 sections of the Act a breach of which can constitute a criminal offence. In almost all of these sections, criminal liability is imposed on the directors personally, in addition to the company (there do exist limited defences relating to reasonableness on the part of directors). Penalties can be up to $10,000 depending on the offence. Far more serious, dishonesty offences can carry up to 5 years imprisonment or a fine of $200,000 (ss373,374).
Liability in tort: A director can be liable for a tort (for example, negligence) committed primarily by the company, but through their agency – if they have assumed personal responsibility for their actions.
A directors who trades shares using inside information is liable to account to the buyer to the extent that the shares are sold for more or less than their fair value (s149).
Directors should also be aware of both the company’s and their own obligations under any other legislation – which also have the potential to fix personal liability on directors. These include, but are not limited to the Financial Reporting Act, Fair Trading Act, Health & Safety in Employment Act, Resource Management Act, Commerce Act, Privacy Act, Human Rights Act, and Building Act.

Conclusions

It will hopefully be apparent by now that the significance and potential consequences of these duties and liabilities are not to be sneezed at. Unfortunately, it seems that at present directors are either largely ignorant of these standards or do not take them sufficiently seriously. Perhaps more unfortunate is that it is usually not until a company fails that the extent of these duties becomes relevant – when a director’s decision is reviewed by the Court.

It is imperative to get things right at the time each decision is made. If you have any doubt as to the wisdom of any decision or act either of your own or your fellow directors, seek legal advice.

Because the implications of these duties are potentially severe, companies are increasingly availing themselves of the indemnity and insurance provisions of the 1993 Act as part of a risk management strategy designed to avoid personal liability on the part of directors.

The short answer is, it depends. Key factors include what the employment agreement says about varying the agreement, how significant the proposed change is, why there is a need for the change, whether the change is to the employee’s benefit or not and whether the employer and employee agree.

This article considers the situation where the employment agreement states, as is common, “This agreement may be varied by written agreement between the employer and employee”, the change proposed is more than inconsequential and is not to the employee’s benefit.

Good Faith

The starting position is that the employer and the employee are required, when bargaining for a variation to an employment agreement, to “deal with each other in good faith”. At a minimum that means being “responsive and communicative” towards each other and “active and constructive in continuing a productive relationship.”

In short, in the situation outlined above, employers should tell employees well in advance of the proposed change, the reasons for it, and the possible consequences if the change does not go ahead. A possible consequence may, depending on the circumstances, be that the employee’s employment is in jeopardy. However, that should only be raised if that is a genuine possibility, rather than as a threat.

Employees should be given an opportunity to give feedback on the proposal, including any concerns or alternative suggestions. Employers should maintain an open mind to suggestions made and be willing to vary their proposal if feasible.

Employees should also be told, prior to giving feedback, that they are entitled to get independent advice on the proposal and given sufficient time to get that advice, if they so choose.

If an employee’s employment may be in jeopardy if the change does not proceed, then employees should also be given an opportunity to have a support person or representative with them when they give their feedback.

Employees should not simply reject proposed changes out of hand and refuse to discuss them with the employer. They should engage with their employer and be prepared to discuss concerns and put forward alternatives, with a view to trying to reach resolution if possible.

What should happen if agreement is reached?

If agreement is reached, the terms of the existing agreement should be followed in recording that variation. For example, it should be recorded in writing, signed by both parties, and attached to the agreement.

If the change is solely to the advantage of the employer, an employer should also consider offering the employee some sort of “consideration” (i.e. benefit) in exchange, in order to ensure that the change is binding. This could be a one off payment or a pay increase or some other benefit.

While it is not clear legally that consideration is always required where the parties agree to a change, it is prudent to do so to limit the risk of a future dispute.

What if agreement can’t be reached?

This can be a difficult one. On one hand, the law recognises, as a general proposition, an employer’s prerogative to manage or organise its business. On the other hand, that is not an unconstrained right and the terms of the employee’s employment agreement cannot be ignored.

Consequently, where the proposed change effects an express term of the employee’s employment agreement (e.g. their hours of work) and the agreement states that any variation will be by mutual consent, it will be more difficult for an employer to unilaterally effect a change justifiably, particularly a substantial one.

Nonetheless, in some circumstances, a unilateral change may be permitted, where, objectively, that change is “fair and reasonable” and reasonably implemented. Whether any such change meets that test has been said by the Courts to involve “questions of fact and degree”, i.e. how significant is the change and why and how is it being introduced. Consequently, the individual facts of each case will be critical in assessing whether a change is likely to be upheld or not.

Either way, as with changes by agreement, where the change is solely for the benefit of the employer, the employer should offer some benefit in exchange for the proposed change. This also increases the chances of agreement being reached.

Drafting new employment agreements – a take home message for employers

If you are an employer, we recommend that new employment agreements include scope for changes to be made by the employer where business needs justify it. While employers will still need to follow a fair process, in the event of disagreement, more flexible agreement terms potentially provide greater flexibility in implementing change.

Under the Financial Services Providers (Registration and Dispute Resolution) Act 2008, everyone who provides, or offers to provide, a financial service in New Zealand or from New Zealand to other countries must register as an FSP. Importantly, before you offer your financial services you must be registered.

There is a simple straightforward application process for registration. This can be found online on the website of the Ministry of Business, Innovation and Employment.

Firstly, the application process depends on what kind of FSP you are. There are three different types depending on your business and the services you will provide – an individual; an entity already registered via the Companies Office; or another entity or body.

Applying as an individual:

There is basic information which you will have to include the application such as your full legal name, date of birth, residential and contact address, your business address and any trading names you use.

Applying as a business already on a Companies Office register:

You will have to provide your company or entity’s name, the Companies Office number or its New Zealand Business Number. If you do not know what this is, you can search for it via the Companies Register. Furthermore, include any trading names you use, your business and contact address and the basic details on your directors and other controlling owners and managers.

Applying as another entity or body:

The basic information you will have to provide is about your business, such as its legal and trading names, the country of origin, the business and communication address and also an email address. You will also have to provide the basic details on your directors and other controlling owners and managers.

For all applications:

Firstly, in completing this process, whatever kind of FSP you are, you will have to provide information about your business and the services it will provide. In the form you fill out online there are a list of services. You would select all the ones that you intend to provide upon registration. This is something that needs to be kept up to date as well. The services that you need to declare can be found under section 5 of the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Secondly, every individual FSP and those people in charge will have to undergo a criminal history check.

If you are applying to the Financial Markets Authority (FMA), at the same time, to be an Authorised Financial Advisor (AFA), there is additional information to prepare which can be found here.

When registering as a FSP there are transaction fees to pay:

○ Application fee, incl. GST: $345.00
○ Criminal history check fee per person, incl. GST: $13.00
○ FMA levy, incl. GST: $690.00
○ TOTAL: $1048.00

Furthermore, after you register you have to pay fees once you’ve completed your annual confirmation:

○ The Companies Office Fee, incl. GST: $75.00

Alongside this, you will pay levies to the Financial Markets Authority (FMA).

○ The amount of levies you pay depends on your class of service provider and the services you provide.
○ Levies are listed under Schedule 2 of the Financial Markets Authority (Levies) Regulations 2012.

This online process is efficient and easy and should not take up too much of your time.

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.

Who is a director?

Who are duties owed to?

1. Duty to Act in Good Faith and in the Best Interests of the Company (s131)

Good Faith

Acting in the best interests of the company

Exceptions to best interests rule

Strait-jacketed?

2. Duty to Exercise Powers for a Proper Purpose (s133)

3. Duty to Comply with Companies Act 1993 and Company Constitution (s134)

But wait, there’s more …

And more …?

4. Reckless Trading (s135)

Don’t be so reckless …

Objective Test

Arise from your slumber

5. Duty in relation to Obligations (s136)

Cramping their style?

6. Director’s Duty of Care & Skill (s137)

The Test

Don’t go down these roads …

A Higher Standard?

7. Use of Information and Advice (s138)

Relief from Omniscience?

8. Director’s Interests (ss139-144)

Cards on the Table

Avoidance by the Company

9. Use of Company Information (s.145)

Pssst! …… (Don’t) Pass it on!

10. Further Liability

Conclusions

Good Faith

What should happen if agreement is reached?

What if agreement can’t be reached?

Drafting new employment agreements – a take home message for employers

Applying as an individual:

Applying as a business already on a Companies Office register:

Applying as another entity or body:

For all applications:

When registering as a FSP there are transaction fees to pay:

Christchurch CBD

Christchurch – Riccarton

Rolleston

Hokitika

Auckland