New International Tax Legislation

Under FATCA (Foreign Account Tax Compliance Act), adopted by New Zealand in 2014, the United States aims to detect and prevent tax evasion by US citizens and tax residents on their worldwide income from financial assets owned by an offshore entity, which they control e.g. a family trust or company settled/incorporated in New Zealand.

Additionally, from 1 July 2017, New Zealand endorsed the OECD’s standard Automatic Exchange of Financial Information in Tax matters (AEOI), which incorporates the Common Reporting Standard (CRS),a global version of FATCA. New Zealand is 1 of 101 OECD nations to have signed a multi-lateral agreement to combat offshore tax evasion on a global scale. All citizens of these countries are subject to the same level of tax scrutiny in New Zealand and the other member or participating countries, as are Americans under FATCA.

All entities (family trusts, companies and partnerships, but not individuals) have to comply with this legislation. Al professionals, such as ourselves, accountants, investment fund managers/advisors etc. needs to advise their “entity” clients of their obligations under this complex and far-reaching legislation.

Is your trust/company/partnership (“entity”) a Financial Institution under FATCA or CRS?

It is important to know whether or not your entity (trust, company, partnership) is either a Foreign Financial Institution (FFI) under FATCA or a Financial Institution (FI) under CRS, both or neither. If your entity is a FFI then it needs to register on the United States’ Internal Revenue Services (IRS) site. If your entity is a FI under CRS then when the IRD site is up and running next year, your entity will have to disclose to IRD all financial information and personal details for those trustees and beneficiaries who are residing overseas in one of the 100 other participating jurisdictions combating offshore tax evasion.

We are in the process of corresponding with all of our trust clients and providing them with a form to assist the trustees decide whether or not their trust has to register on the US site and ultimately, report to our IRD under CRS. If you are a trust client of ours, and you have not yet received this form, please contact us urgently.

Can this legislation be ignored?

Unfortunately, registration on the IRS site under FATCA is compulsory even if your trust is not “controlled” by any US tax resident or citizen, provided:

(a) It has some financial assets (shares, bonds, term deposits) managed by an investment advisor/fund manager OR an FFI, such as one of our corporate trustees is one of the trustees of your trust AND

(b) More than 50% of the trust’s gross income for the proceeding calendar year comes from financial assets (excluding rental from property).

Unfortunately, (b) above will be satisfied even if the only income-producing asset of the trust is a bank account which earns minimal interest. However, if the trust or other entity earns the majority of its income from residential rentals, it will not satisfy (b) above.
Once registered, no further personal information disclosure is needed, if there is no such “control” by a US tax resident or citizen. By contrast, registration on the IRD site under CRS is required only if your entity is “controlled” by anyone who resides overseas (but not the US).

What if my entity is not a FFI or FI?

If your entity is neither a FFI or FI then it will, by default, be a NFFE (Not a Foreign Financial Entity) or a NFE (Not a Financial Entity). As such, your entity will not have registration requirements, but may have reporting obligations to other FFI’s/FI’s such as a bank with which your entity has funds or an investment house/advisor with whom your entity has a share portfolio. Such institutions are in the process of sending, and will continue to send, to their customers/clients Self-Certification forms similar to those we are sending to our client trusts. If the completion of these forms conclude that your entity is a passive NFFE/NFE then it must, on request, disclose details of US and other overseas controlling persons to the entity’s bank or investment advisor etc., which report to IRD. If however, less than 50% of your entity’s gross income for the past calendar year is from passive income (including rental from property) then it will be deemed an active NFFE and will have no reporting obligations, even if it is “controlled” by a US or other overseas resident person.

These are complex matters, but compliance is mandatory with not unsubstantial fines able to be imposed on those who breach their obligations under this legislation.
Should you have any query regarding these matters and how they may affect your trust, company or partnership, then please consult with us because to ignore this legislation is clearly, not an option.

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

What happens if…?

What happens if I have a car accident?

What happens if I get a letter from someone holding me responsible for damage to their property?

What happens if I turn on my computer, and I’m greeted by a hacker’s message, instructing me to pay bitcoin ransom in order to access my files?

The resilience of a business is often defined by the risk management systems that are in place. The risks that a business will need to manage fall, broadly speaking into three categories – Physical Assets, Liabilities, and increasingly, Cyber. Every business has some form of risk that will fall into these three categories.

Physical Assets – every business has them – a phone or a laptop, machinery or stock, premises or a vehicle. What does it mean for your business if these assets are taken out of the picture? Most businesses depend on some form of physical assets, and any loss or damage to these assets can interrupt the operation of the business, costing money. It’s worth thinking about if you can afford to replace your assets quickly, and how much is any down time going to cost your business?

Liability – you don’t actually have to do something wrong for liability risks to affect your business – an allegation is enough. All it can take is for a letter or an email, holding you responsible for damage to another persons’ property, and this will cost your business money – simply by defending your business from the allegation.

Cyber – We are becoming increasingly dependent on technology to conduct business, and with this comes risk from when the technology is disrupted – from ransom-ware attacks, to duplicate invoices with a new account number, to breaches of the Privacy Act – the implications of a cyber attack can be far reaching for a business. How long can you continue to trade if you can’t get into your system or backup files?

All businesses benefit from having a risk management plan which utilizes four potential strategies to manage risk:

Avoid risk – Change plans to eliminate the problem
Control/Mitigate risk; – Reduce the probability and/or impact through a proactive approach
Accept risk – Take the chance of negative impact or budget for contingency
Transfer risk – Outsource risk by way insurance

The role of an insurance broker is to provide advice on identifying business risk and recommending cost effective solutions to manage them. He or she can then advise you what risks should be insured, and then if you agree, canvass the insurance market to obtain the best insurance solution that is tailored to fit the needs of your business, at a competitive price.

It’s finding out your business’ individual risk appetite that makes a good insurance broker a valuable asset to your professional services team.

If you don’t know the answer to the question: “What happens if…” then you should consider seeking advice before something goes wrong.

Chelsea is passionate about the growth and development of the emerging Social Enterprise sector. Born and raised in Christchurch, she wants to support the businesses that are doing good for our communities. Our mission at Crombie Lockwood is to position your business to financially survive any insurable event. Chelsea would welcome any opportunity to assist you to position your business to become more resilient to the risks associated with doing business, and consequently support you to achieve your purpose.

Chelsea Smith

Insurance Broker

Crombie Lockwood

(03) 339 5268

Chelsea.smith@crombielockwood.co.nz

Have you ever wondered what happens when you go bankrupt? This article looks at the general process and effect of bankruptcy in New Zealand as well as the effect on a student loan.

The general process and effect of bankruptcy

The process of bankruptcy in New Zealand is set out in the Insolvency Act 2006 (‘the Act’). The Act also provides for an additional formal alternative to bankruptcy, known as the “No Asset Procedure”.

The fact a person is living overseas does not automatically preclude them from being able to be made bankrupt under New Zealand law.

Bankruptcy

There are two ways a person can be adjudicated bankrupt – on the application of a creditor or the debtor can file for adjudication himself or herself.

In terms of the latter, if the combined debts of a debtor amount to $1,000 or more, he or she can apply to be adjudicated bankrupt. There are certain steps which need to be followed which are set out in the Act.

Once the court makes the order of adjudication, the debtor’s bankruptcy commences. It usually lasts three years but normally remains on a person’s credit record for up to 7 years.

The appointed Assignee will advertise the order or adjudication in the Gazette, on the Insolvency and Trustee Service and in the local newspaper.

The general effect of bankruptcy includes:

(a) Once the debtor has been adjudicated bankrupt, most of the bankrupt’s property vests in the Official Assignee, whether in or outside New Zealand, and the bankrupt’s rights in the property are extinguished. The powers that the bankrupt could have exercised in, over, or in respect of any property (whether in or outside New Zealand) for the bankrupt’s own benefit vest in the Assignee. The Official Assignee can therefore seize and sell the bankrupt’s property.

(b) The debtor may retain certain assets, such as tools of trade and necessary household furniture. However, the bankrupt can only retain these assets up to a maximum value. The maximum value for these assets is fixed in the Assignee’s discretion. The bankrupt may also retain a motor vehicle, the value of which must not exceed $6,000. In addition, property held in trust is not affected by the bankruptcy.

(c) The bankrupt must inform the Assignee about his or her property and provide various financial records, including disclosing any property acquired during the bankruptcy, such as a prize or an inheritance.

(d) The assignee can investigate past financial transactions and can retrieve gifts made within a certain timeframe.

(e) Unsecured creditors (secured debt is excluded from bankruptcy) are precluded from continuing to personally pursue the bankrupt for any debt included in the bankruptcy or to add penalties/interest to the debt. All proceedings to recover any debt provable in the bankruptcy are halted.

(f) Unsecured creditors can however prove their claims against the debtor, and the Official Assignee will distribute the bankrupt’s assets among them based on these claims (if there are sufficient funds to do so) in order of a set priority.

(g) The Official Assignee will also decide whether the bankrupt needs to make regular repayments to help repay their creditors.

(h) Creditors that are not based in NZ will be sent a report if they are listed in the bankruptcy. A bankrupt can include that debt in their bankruptcy. A creditor may prove for any debt due to him or her from the bankrupt, no matter whether the debt is governed by New Zealand law or foreign law. A foreigner proving for a foreign debt stands in the same position as a New Zealand creditor proving for a New Zealand debt.

(i) The bankrupt will need the Official Assignee’s permission to, inter alia:

1. take part in the management or control of any business, to be self-employed, or to be employed by a relative or a relative’s business; and

2. travel overseas (the bankrupt can return to New Zealand but if they want to leave again they will need to apply for permission).

(j) The bankrupt also needs to advise the Official Assignee if they change their name, address, employment, terms of employment or income/expenditure.

(k) The public register (of bankruptcies) can be searched from overseas. This may therefore affect a bankrupt’s credit rating outside of NZ.

No assets procedure

To be eligible for the No Asset procedure a person must have debt between $1,000 and $47,000, no realisable assets (excluding cash up to $1000, motor vehicle up to $6000, tools of trade and personal and household effects) and for whatever reason have no way to pay any of their debts.

It has the effect of preventing unsecured creditors from taking steps to enforce debts against the affected person that are included in the procedure. It does not however apply to student loans.

It lasts for 12 months although remains on one’s credit record for longer (it currently remains on the insolvency register for up to 4 years). It does not have as many restrictions as bankruptcy but it does impact one’s credit rating.

The effect of bankruptcy on a student loan

When a person becomes bankrupt, their student loan is written off by the Inland Revenue Department.

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

Restraint of Trade and Conflict of Interest Clauses

Restraint of Trade Clauses

There is a legal assumption that a restraint of trade is unenforceable unless the employer can prove they have a legitimate proprietary interest and that the restraint of trade is reasonable with regard to the circumstances. This typically requires the employer to establish a link between their proprietary interest and the duties and responsibilities of the employee who deals with those interests and the risk of breach. If the employer has proven these two elements, the burden then falls to the employee to show that the restraint is contrary to their personal interest and the general public interest.

The definition of proprietary interest includes three main categories: trade or customer connections, the stability of the employer’s workforce, and trade secrets.

When considering whether a restraint of trade is reasonable, the Court will consider the context of the whole of the agreement between the parties and against the background of the circumstances in which the contract was entered into. In general, a restraint of trade will be reasonable where it grants adequate, but no more than adequate, protection for an employer.

Reasonableness – Duration and Geographical Location

When determining reasonableness, the Court will additionally consider how long the restraint of trade lasts for. When considering the validity of the restraint’s duration, the Court will look at the facts and circumstances of the relevant company’s business, the nature of the interest to be protected, and the potential effect of an ex-employee opening their own business. Industry practice will also be taken into account. In general, the Court will rarely find a restraint of trade clause that lasts for longer than one year to be reasonable.

The geographical coverage of a restraint of trade is also relevant when determining reasonableness. Worldwide restrictions are typically found to be invalid, unless the restriction requires worldwide coverage to be reasonably effectual. The Court has upheld restraint of trade clauses where worldwide coverage was necessary because of the nature of the industry in question and the impracticalities of enforcing a less onerous restraint of trade clause; however, this is the exception, rather than the general rule.

Consideration

If an employee signs an employment agreement containing a restraint of trade provision, it is assumed there is consideration for the restraint of trade as this was part of the bargaining process. Therefore, a restraint of trade included in an employment agreement at the outset will not necessarily be unreasonable.

Restraint of Trade Clauses – Court Powers and Contracting Out of the Court’s Jurisdiction

If a party cannot prove that a restraint of trade clause is enforceable, the Court has a jurisdiction to alter a restraint of trade to make it enforceable or to delete it from the employment agreement. This typically involves reducing the geographical coverage and/or the duration of the restraint. We are unsure whether parties can later agree to alter an invalidated restraint to make it enforceable, as we have not been able to find any case law on this point.

If the Court finds that an employee has breached a valid restraint of trade clause, it may require the ex-employee to pay exemplary and/or compensatory damages. It may also issue an injunction preventing an ex-employee from carrying out the conduct which constitutes a breach of the restraint of trade.

Conflict of Interest Clauses

Case law seems to be silent as to the effect of conflict of interest clauses after the termination of an employment agreement. Therefore, if an employment agreement does not mention the effect of a conflict of interest clause post-employment, there is an argument that the conflict of interest clause no longer applies.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other Employment matters, please contact Hannah Carey – hannahcarey@parryfield.com or any of the team at Parry Field Lawyers should you need assistance – 03348 8480

What is Copyright?

Copyright is the set of legal rights given to the creator/owner of an original work. It prevents other people from doing certain restricted acts in relation to a copyright work without the permission of the copyright owner. These restricted acts include (among others) the right to:

Copy the work;
Issue copies of the work to the public by sale or otherwise;
Perform, play or show the work in public;
Communicate the work to the public;
Adapt the work; and
Do any of the above in relation to any adaptation of the work.

There is no requirement to assert or register copyright in New Zealand. Copyright recognition in New Zealand arises automatically in various kinds of works if:

The work is original; and
The author is domiciled in New Zealand or in a prescribed foreign country or is a citizen or resident of New Zealand or of a prescribed foreign country

Who Owns Copyright?

The Crown is the first owner of any copyright in work made by a person employed or engaged by the Crown under a contract of service, a contract of apprenticeship, or a contract for services.
Subject to Crown ownership, and unless otherwise agreed, in most cases the author is the first owner of the copyright in a literary work.

However, unless otherwise agreed:

if an employee makes a literary or artistic work in the course of employment, the employer owns the copyright; and
if a person commissions and pays or agrees to pay for the taking of a photograph or the making of a computer program, painting, drawing, diagram, map, chart, plan, engraving, model, sculpture, film, or sound recording, and the work is made in pursuance of that commission, the commissioning person owns the copyright.

Attribution

The author of a literary, dramatic, musical, or artistic work that is a copyright work has the right to be identified as the author of the work whenever the work is published or communicated to the public (section 94). The right to be identified as the author is not infringed unless the author has asserted the right be identified as author (section 96).

Use of Third Party Content

Where a third party owns copyright in content, you will not be entitled to copy or adapt that content or a substantial part of it without the permission of the copyright owner or unless the copying or adaptation can be justified under an exception.

What is a Substantial Part?

What constitutes a substantial part of a copyright work is a question of ‘fact and degree’. The quality or importance of what has been taken is much more significant than the quantity. Copying a part of a copyright work that by itself has no originality will not normally be copying a substantial part of the copyright work.
Copyright protection is not focused on originality of ideas but on originality of expression. The importance of the copied part to the original copyright work as a whole is assessed to determine whether it forms a substantial part of the original copyright work.
Originality tends to lie in the detail with which the basic idea is presented. The greater the originality, the greater the protection that copyright law will afford it.

Objective Similarity

Even if another copyright work has been copied, the copyright won’t necessarily have been infringed unless the copy is objectively similar to the original. It is possible to take underlying ideas and concepts that are expressed in a copyright work and express those ideas in a significantly different way which therefore does not infringe copyright.

There is limited clear case law, though, on what counts as objective similarity. In one case, the Judge said ‘a copy is a copy if it looks like a copy’.

Causal Connection

It is also necessary to show that the infringing work was actually copied directly or indirectly from the original copyright work.

Altered Copying

Taking the ideas expressed in a copyright work and expressing those ideas in a different words and in a different format may produce new content that is not causally connected with or objectively similar to the original work.
However, copyright will still be infringed if the altered copy has ‘incorporated a substantial part of the independent skill, labour etc. contributed by the original author in creating the copyright work’.

Fair Use Exceptions

There are a number of fair dealing and other exceptions under New Zealand’s Copyright Act 1994.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you.

Kris Morrison – krismorrison@parryfield.com

“The Lean Startup” by Eric Ries: Review and discussion of key points

Being involved as the founder of an IT start-up (Active Associate – a chat bot for law firms) this book was recommended to me as essential reading. The subtitle is: “How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses”.

It definitely provides a lot of good ideas as the main point is that you should constantly be evolving – don’t try and build the perfect product. Particularly with software that is important to remember because demands shift and change so quickly among consumers.

The author outlines more about that basic point as follows:

After more than ten years as an entrepreneur … I have learned from both my own successes and failures and those of many others that it’s the boring stuff that matters the most. Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.

He summarises the five key principles regarding the Lean Startup idea as follows:

Entrepreneurs are everywhere. So the Lean Startup approach can work with any size of company or sector.
Entrepreneurship is management. Startups require new types of management given their context of uncertainty.
Validated learning. Startups exist to learn how to build a sustainable business. This learning can be tested and validated.
Build-Measure-Learn. Startups turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere.
Innovation accounting. Need to measure progress, set up milestones, and how to prioritize work.

There is quite a lot on this also at the website The Lean Startup

The main takeaway from the book is the need to continually innovate and evolve and not settle or try to have a “perfect” solution before you actually start rolling it out to your customers. In order to give a taste of the concepts that the author then goes on to outline here are some key quotes that I found were the most interesting and potentially the most applicable to many others:

The Lean Startup asks people to start measuring their productivity differently. Because startups often accidentally build something nobody wants, it doesn’t matter much if they do it on time and on budget. The goal of a startup is to figure out the right thing to build – the thing customers want and will pay for – as quickly as possible.
In the Lean Startup model, every product, every feature, every marketing campaign – everything a startup does – is understood to be an experiment designed to achieve validated learning.
This is one of the most important lessons of the scientific method: if you cannot fail, you cannot learn.
What differentiates the success stories from the failures is that the successful entrepreneurs had the foresight, the ability, and the tools to discover which parts of their plans were working brilliantly and which were misguided, and adapt their strategies accordingly.
A minimum viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible. It is not necessarily the smallest product imaginable, though; it is simply the fastest ways to get through the Build-Measure-Learn feedback loop with the minimum amount of effort.
Contrary to traditional product development, which usually involves a long, thorough incubation period and strives for product perfection, the goal of the MPV is to begin the process of learning, not end it.
It’s often about gaining a competitive advantage by taking a risk with something new that competitors don’t have yet.
Only 5 percent of entrepreneurship is the big idea, the business model, the whiteboard strategizing and the splitting up of the spoils. The other 95 percent is the gritty work that is measured by innovation accounting: product prioritisation decisions, deciding which customers to target or listen to, and having the courage to subject a grand vision to constant testing and feedback.

As a lawyer I found the following quote quite interesting because it is definitely something we see among our clients with early stage ideas. They often are worried about someone stealing the idea and so ask about patents, copyright, trademarks etc. But often it is the best advice just to start doing something and learn as you go and be the front runner in the industry rather than trying to have everything sorted and perfect in advance.

Legal risks may be daunting, but you may be surprised to learn that the most common objection I have heard over the years to building an MVP is fear of competitors – especially large established companies- stealing a startups ideas. If only it were so easy to have a good idea stolen! Part of the special challenge of being a startup is the near impossibility of having your idea, company, or product be noticed by anyone, let alone a competitor.

I found the sections where he described the businesses that he had been involved with were the best parts (rather than describing what other people had done). For example, these were the four questions that he asked his team:

“Do consumers recognise that they have the problem you are trying to solve?
If there was a solution, would they buy it?
Would they buy it from us?
Can we build a solution for that problem?

The common tendency of product development is to skip straight to the fourth question and build a solution before confirming that customers have the problem.”

Overall this book was helpful for me to read through although the key concepts are outlined above and so it felt like it was a longer book than it needed to be. But that is just my own impression and others might enjoy the variety of stories that are told. On other parts of this site we are putting up reviews of books which entrepreneurs will want to have to hand when they go through the journey of starting up something new.

If there is a book you think we should review, or you would like to do a guest review, then just let me know at stevenmoe@parryfield.com!

Great vision and ideas take resources to realise. Whether you are starting a company, a non-profit venture, or even a charitable project, one of the first things you need to find is money to fund the research and development of your new idea.

Banks are the traditional source of funding, but sometimes, you can look instead to your family, friends, professional contacts or other people with similar vision for financial contributions. What are some of the key things to think about if you want to go down that route and seek contributions from them?

1. Will This Ruin the Relationship?

The first point is not a legal consideration as such – more of a home grown truth: money has a unique way of affecting relationships (often in a bad way). You may think your relationships are above this and of course there is 100% certainty your new idea will be a tremendous success. But if whatever your friend or family member invested was lost how would this impact that relationship?

If you can foresee that there could be hard feelings and resentment then you need to seriously weigh up if it is worth risking that relationship.

2. What Contribution Will They Make?

Second, think about what form the contribution will take. Will you be seeking loans from people with a fixed end date and payment of interest? Or do you actually want to bring people on board as partners in a partnership or shareholders in a company and involve them in the future success that you will hopefully enjoy?

What will fit best for you, your contributors and the future of your project?

3. How Involved Will they Be?

Third, consider what level of say each person will have in the decision making for the project. How involved will these people be in the decision making or are they simply silent contributors with limited rights – these points should be clearly agreed and documented.

4. Do I need to comply with the Financial Markets Conduct Act?

Fourth, understand the rules relating to fundraising and what exclusions might apply – some of these are outlined below. The Financial Markets Conduct Act 2013 is incredibly long and detailed but the basic policy approach is that you will be caught by it and need to provide disclosure of information to investors unless there is an exemption for what you want to do.

What are the key exclusions that might apply?

Some of the most relevant exemptions in the context being discussed in this article would be:

Close business associates

Offers to people who already know the business are subject to an exclusion because they would be unlikely to need full disclosure before making an informed decision about whether to invest or not. They need to be able to assess the merits of the offer and obtain information from the person making the offer.

Whether a person actually is a close business associate will need to be assessed on the facts but the term is defined to include situations such as the person being a director or senior manager of the company, holding 5% or more of the votes of the company, is a spouse, partner or de facto partner of a person who is a close business associate (these are just some of the examples to show the nature of the relationships caught).

Relatives

Along similar lines to the last exclusion, offers can be made to relatives. They are defined to include the following: A spouse, civil union partner, de facto partner, grandparent, parent, child, grandchild, brother, sister, nephew, niece, uncle, aunt, first cousin. The list also includes spouses, partners and de facto partners of those people listed as well as whether or not they result from a step relationship or not. Also included are trustees of a trust where one of the above is a beneficiary.

We had an interesting one recently where a person said that their Godfather wanted to invest – there was a close relationship but they were not a “relative” under this definition, so you need to objectively think about things each time and not just make assumptions that someone is a relative as they need to fit the definition.

Small Offers

A small offer must be for debt or equity securities and for up to a maximum of 20 investors and raising a maximum of $2 million in any 12 month period.

Such offers need to be a “personal offer” which can only be made to certain individuals, such as those who are likely to be interested in the offer (eg some previous connection and interest known), a person with a high annual gross income (at least $200k in each of last two income years) or someone who is controlled by such a person.

Some other key points:

Small offers also have an advertising prohibition so it is important to check what you will do to get the word out and make sure it is not going to breach that requirement.
Notification is required of certain information about the offer to the FMA within one month of the end of the relevant accounting period that the small offer was made.
A warning needs to go on the front of documents which looks like this:

“Warning

You are being offered [name of financial product type (for example, ordinary shares)] in [name of issuer].

New Zealand law normally requires people who offer financial products to give information to investors before they invest. This requires those offering financial products to have disclosed information that is important for investors to make an informed decision.

The usual rules do not apply to this offer because it is a small offer. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment.

Ask questions, read all documents carefully, and seek independent financial advice before committing yourself.”

Other Exclusions

This article has been focused on investments by family and friends so has not looked at every possible exclusion. In fact the above are the ones that we see most commonly being used in most situations. However, for more detail on other exclusions have a look at this article on Wholesale Investors and Crowdfunding and/or the FMA site here.

We often provide advice to people around the appropriate fundraising strategy for their start-up and from experience every situation is unique. This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. If you would like to discuss the options and work out what might fit best for you then drop us a line (Kris Morrison at krismorrison@parryfield.com or Steven Moe at stevenmoe@parryfield.com) and we would be happy to discuss.

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

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

Who is the OIO?

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

When is consent needed?

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

What about related parties back overseas?

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

What level of control are you talking about?

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

So what is a “sensitive” New Zealand asset?

This can be complicated to determine but generally includes:

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

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

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

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

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

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

How do I show Benefit to New Zealand?

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

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

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

How long will all this take?

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

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

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

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

New Zealand has a similar takeovers regime to that in other Commonwealth jurisdictions like Australia and England. There are specific rules which govern when a takeover offer will need to be made and the process around doing so. This article sets out the key thresholds involved and points to be aware of if an acquisition in New Zealand is being considered.

Where are the rules set out?

Takeovers are governed by the Takeovers Code which became law 15 years ago. The purpose is to make sure that the acquirer of shares in a company complies with certain rules when certain thresholds are met. This means that shareholders are informed where there is a potential change of control of the company they own shares in.

Which companies do the rules apply to?

The rules only apply to certain “Code Companies” which are only New Zealand registered companies that:

have (or recently have had) listed shares that trade on the NZX; or
have 50 or more shareholders who hold voting rights as well as 50 or more share parcels.

What are the key thresholds?

The fundamental threshold is 20% because acquisitions of shares which will take a shareholding above 20% are caught by the Takeovers Code. In measuring this the percentage held by associates is also examined. Such acquisitions must be done in compliance with the rules.

A takeover offer can either be a partial or full takeover offer. Full takeover offers mean the offeror has to receive a minimum level of acceptance of the offer. So if the offeror does not reach more than 50% then the entire takeover fails.

This is in contrast to a partial takeover offer where the offeror makes an offer for only some of the shares. Whether it is successful will depend on the level that is sought – if for more than 50% then the acceptances need to be above that level. If for less than 50% then shareholders vote for or against the offer – so the offer needs to get to the percentage specified and also be approved by a majority of the shareholders. As this indicates, these rules are more complex than a full takeover.

The following are also important percentages to be aware of:

50% shareholding: As mentioned above, this is important in the context of a takeover to determine what rules apply;
5% creep: is permitted each year over a 12 month period for Shareholders who already own more than 50%; and
90% threshold: compulsory acquisition of shares is permitted above this level because they have become a dominant owner.

Conclusion

This short summary of some of the key points regarding takeovers in New Zealand is brief and the specific circumstances of any situation will need to be examined. If you have a target in mind then it would pay to discuss the context of that particular proposal with your advisers to obtain input on the best approach to adopt as one size will not fit every situation.

Introduction

When considering entering into a joint venture arrangement in New Zealand with another party it is important to be aware of potential issues before they even raise their head and become problems. This article describes some of the key points to watch out for if you are considering a joint venture in New Zealand. It can also serve as a good reminder of a checklist of points to consider to review the health of your joint venture if you are already in one.

1. Valuing different contributions

It can be hard to value what each party brings to the table. Typically a joint venture will be entered into because each party has recognized that the other one is able to bring some unique skill or background to a proposed business. Often for one party this may simply be the ability to provide capital such as finance or land while the other party has a certain expertise. Alternatively, two companies who are generally competitors may decide that working together will help them to scale up and achieve more.

Either way the key point is not to undervalue what you bring to the joint venture. If the other party has an ingenious idea but no financing and you can unlock capital for their idea to grow, then you hold significant bargaining power. Equally if you are the one with the industry expertise and knowledge then you should not sell yourself short in negotiations with a financier. We have seen this from both sides and often wondered why one party wasn’t more highly valuing what they bring to the table. Sometimes there is a tendency to value tangible contributions over the intangible ones, which may not always be appropriate. So, in each case hold out for as much equity and participation in the joint venture as you can.

2. Form of joint venture

Most commonly we would see a new company formed under the Companies Act 1993, which has two shareholders. That way the new entity will be a standalone venture separate from each of them. Typically it will have its own set of advisors and employ its own staff (although one party may second certain individuals in to assist). Profits will be returned as dividends to the shareholders.

However, that is not the only option. Alternatively there could simply be a joint venture agreement between two parties which sets out how they will work together. This is called an unincorporated joint venture. There is no separate legal personality of the joint venture so it cannot contract on its own with third parties. This model may be used for financing, tax or accounting reasons.

Another possible structure is a Limited Partnership under the Limited Partnership Act 2008. This structure may be particularly attractive when one of the parties is an overseas entity because tax liability sits at the level of the partners rather than in the corporate structure. Also the details of the limited partners are less publicly available.

It pays to work through the possible structures well in advance so you know what you want to propose to the other side.

3. Ownership shares and deadlock

You may think that an equal sharing in ownership is fair and that is usually correct. However, the danger of an equal split is that decisions can get stalled if the parties cannot agree and so deadlock can result. This can have a negative impact on the profits and reputation of the joint venture. There are some ways to deal with a situation of deadlock though which are outlined in the next point.

4. Overcoming deadlock

A deadlock situation can be fatal to a joint venture. This is especially so when the shareholding is the same and there are also an equal number of directors appointed by each party. One way to deal with this is to have a rotating chairman who has the casting vote. Also, there can be a list of really key issues which are reserved as decisions for the shareholders rather than directors. All joint venture arrangements should have clear disputes resolution procedures, including, where appropriate the ability to refer matters to independent experts or umpires.

5. “Service” arrangements and extraction of value

Commonly we see that one party is the expert in the subject matter of the joint venture and so they often end up contracting to provide services to the joint venture. That is fine, but the other party should closely look at those agreements and build in clauses that ensure these will be “arms’ length” arrangements. If one party is an overseas entity they may be relying on their local partner to provide a lot of the “on the ground” work. They may not realise that the same local partner is extracting a lot of value from the arrangement with the company through charging of high consultancy services, management fees or other arrangements.

6. Exiting the joint venture

There should be a clear pathway for getting out of the joint venture. For example, if one party wants to exit they may have to first offer their shares to the other party before they can they sell to a third party. Such pre-emption rights can be included in the joint venture agreement.

What if one party wants to exit and the other party does as well? This can be built in as “tag along” rights so that the party who is selling their shares to a third party may need to allow the other party to join in that sale. Other typical rights could include “drag along” rights where a party is able to force their joint venture partner to also sell their shares to a third party. All of these options need to be considered and worked through at the start of the joint venture.

7. Other points to consider when setting up a joint venture

The following issues should also be considered at the beginning:

capital and funding obligations going forward;
scope of the JV company;
will it be permissible for the shareholders to enter into other joint ventures or initiatives that may compete with this joint venture?;
business plan and budgets;
management and who will lead the joint venture;
ownership of land;
circumstances that may trigger termination;
tax implications;
minority protection rights;
information flow to parent companies;
marketing arrangements;
powers of veto;
will there be parent company guarantees;
confirm no competition law issues; and
if a foreign company is involved, whether Overseas Investment Office (OIO) approvals needed.

8. No one situation …

… is like the other. Many joint ventures can have more than two parties, with variable negotiating power, parties with different skills, land or finance available. It is important to tailor the documentation to the situation.

We have experience in setting up joint ventures and providing advice about different situations and would be happy to discuss your circumstances.