Law for New Zealand Business

Week 10

Ownership, Financing and

Distributions

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 Objectives

 To explain the differences between the

position of shareholders (owners) and
debenture holders (creditors)
 To identify and explain the main rights
enjoyed by shareholders

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 Main forms of investment

 Become a shareholder= own part of a

company
 Become a lender-= have a claim against the
company

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 A diversion:

 How does a company obtain long-term

finance?
 Can invite the public to invest- in which case
the Securities Act 1978 applies
 This requires that a company (or other body)
comply with disclosure requirements under
the Act and regulations 1983

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 This regime covers:

 Equity securities (shares)

 Debt securities (debentures and bonds)
 Participatory securities (syndicates, unit
trusts etc)
 Important- issues to members of the public

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 And involves

 The Securities Commission which supervises

and enforces the regime
 Will take cases if necessary

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 The differences between
shareholders and debenture
holders

shareholders

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 The differences between
shareholders and debenture
holders

shareholders

Participate in
Distribution
-If declared

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 The differences between
shareholders and debenture
holders

shareholders

Participate in Vote in General

Distributions Meeting
-If declared

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 The differences between
shareholders and debenture
holders

shareholders
Participate in
liquidation

Participate in Vote in General

distributions Meeting
-If declared

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 The differences between
shareholders and debenture
holders

shareholders debenture holders

Participate in
liquidation

Participate in Vote in General

distributions Meeting
-If declared

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 The differences between
shareholders and debenture
holders

shareholders debenture holders

Participate in
liquidation
Receive
Participate in Vote in General interest
distributions Meeting
-If declared

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 The differences between
shareholders and debenture
holders

shareholders debenture holders

Participate in
liquidation
Receive
Participate in Vote in General interest
distributions Meeting
-If declared
Receive
information
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 The differences between
shareholders and debenture
holders

shareholders debenture holders

Participate in
liquidation
Receive Realise
Participate in Vote in General interest security
distributions Meeting
-If declared
Receive
information
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 The main rights of shareholders

 Shareholders are owners (equity)-

consequently they have powers in general
meeting and as members of groups
(shareholders with the same rights)

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 These collective rights that are:

 Exercised in General Meeting include:

 Oversight of Directors
 Certain decisions are the prerogative of general
meeting either by law or the constitution
 Appointment of auditors

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 Oversight of Directors

 Nb- separation of powers

 But shareholders have the power to question
Directors (s109) and vote them in and out

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 Prerogatives under law or the
constitution
 The law specifies some decisions must be
reserved to general meeting

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 Prerogatives under law or the
constitution
 The law specifies some decisions must be
reserved to general meeting

Ordinary resolution
(s105)

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 Prerogatives under law or the
constitution
 The law specifies some decisions must be
reserved to general meeting

Ordinary resolution Special resolution

(s105) (s106)

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 Prerogatives under law or the
constitution
 The law specifies some decisions must be
reserved to general meeting

Ordinary resolution Special resolution Unanimous

(s105) (s106) Consent (s107)

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 Why the differences?

 Relate to:
 The level of importance to the future of the
company
 The impact on the rights of some or all
shareholders
 The importance of informed choice
 Reduction in information otherwise provided

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 Ordinary resolution

 Applicable unless otherwise specified by the

Act or the constitution
 Includes:
 Appointment of auditor
 Appointment of Directors

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 Special Resolution

 Alteration of the constitution (s32)

 Alteration of class rights (meeting of affected
class) (s117)
 Approving a major transaction (s129)
 Approving an amalgamation (s221)
 Putting the company into liquidation (s241
etc)

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 Unanimous consent

 Relates not so much to decisions but procedure

 If this does not comply with the Act
 Dividend
 Discount scheme

 Acquisition of shares

 Redemption of shares

 Financial assistance

 Remuneration and other benefits for Directors

 Nb: most likely to apply to small companies

 Appointment of auditor- decision not to appoint (at
meeting)- s196(2)- does not apply to issuers
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 Important right of shareholders

 To receive a return on their investment

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 Important in this context:

 Old concept of capital maintenance

 Companies had a registered share capital
 Dividends and other distributions could be paid
out of revenue only
 The liability of members was the amount unpaid
on shares- ie par value less what had been paid
(excluding any share premium)

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 Related to this:

 The issue of a company buying its own

shares or providing assistance to others to
buy them
 Was a reflection of the capital maintenance rule
 However it caused problems and in some cases
prevented management from taking steps that
might benefit shareholders

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 The issues relating to company
capital
 Were dealt with by the Law Commission

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 The Report on Reform

 “arbitrary and misleading concepts of nominal

capital and par value should be abandoned and
instead more direct safeguards be introduced for
creditor and shareholder protection”
 Hence its replacement with consideration of
“solvency”
 Also dealt with matters of share repurchase,
assistance and distributions

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 Therefore what we have now is:

 The equity of a company is deemed to be the paid-

up capital.
 This can be made up of various classes of share
with different rights attached to them.
 The need to identify those shares as “common” or
“preference” has gone.
 A company can issue similar shares but with
different values at different times
 When considering issues of repurchase, assistance
and distribution, solvency is all important
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 So what exactly is this
“solvency”?
 Before any distribution to shareholders can
be made, the company must satisfy the
“solvency test”
 This means that once the distribution has
been made, the company must remain
solvent- able to meet its debts and
obligations

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 And this involves?

 Balance-sheet solvency- assets exceed liabilities

 Liquidity- a company can meet its debts as they fall
due
 Nb Applies to ALL distributions, not just dividend
 Therefore includes: repurchase, assistance to
purchase, reduction in liability of shareholders

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 Why solvency rather than
capital maintenance?
 Because capital may not reflect the total
indebtedness of the company
 Because if a company distributes money
while insolvent it is using the creditors’
money

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 Summary

 Shareholders (equity) are different to

debenture holders (debt) in that their fortunes
go with the company
 Collectively they ARE the company in the
sense they exercise their voting power in
general meeting- different levels of majority
approval are needed for different types of
decision.

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The particular issue of shareholder remedies

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 Reasons
 Split of power between shareholders and
directors
 Directors have access to information and
voting power
 Potential for personalities to overwhelm
business judgment
 Power corrupts??

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 What can shareholders do to
avoid problems?
 The Act gives the shareholders certain
rights. These are:

Restrain buy-back
(s61(8))

Information and Restrain special

Inspection (s178(3)) redemption (s71(7))
Restrain special
assistance (s178(6) & (7))
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 What if a member of the
company believes something
fishy is going on?

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What legal actions are available?

Personal action Derivative action

(s169) (s165) nb tho, s177
Representative action
(s173)

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 Potential problem:

 Negligent or dishonest act (normally by a director)

affects the company
 Therefore company should sue
 Such action may be able to be ratified in general
meeting
 Directors often have majority voting power
 Therefore can ratify
 Foss v Harbottle

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Question of ratification under
s177
•Pavlides v Jensen (1956) cf
•Daniels v Daniels (1978)- “to put up
with foolish directors is one thing: to
put up with directors who are so
foolish that they make a profit of
₤115,000 odd at the expense of the
company is entirely different”
(Templeman J.)
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 What if shareholders are
prejudiced?

S174

Oppressive Unfairly discriminatory

conduct and unfairly prejudicial

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 What sort of situations are we
talking about?- s175
Preemptive rights Special offers
(s45) (s61)
Stock exchange
Consideration acquisitions
(s47) (ss63 and 65)
Financial assistance
Dividends (ss76, 78 and 80)
(s53)
Alteration of rights
(s117)
Acquire own shares
(s62) Major transactions
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 Remedies available
Liquidation

Acquisition rectification

Compensation Alteration of
constitution
Receiver
Regulation of future
conduct

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 Liquidation

 Most significant- on “just and equitable

grounds”
 Most likely where the company is effectively
a partnership- raises questions of mutual trust
 Vujnovich v Vujnovich (1988)
 Ebrahimi v Westbourne Galleries (1973)

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 Note: buyout rights
 When? Major transaction

Changes to the constitution

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 Buyout- Procedure
Give written notice

Board gives written

notice of:

Rescind
agreement

Arrangement for Apply to

purchase court

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What does such a shareholder get
paid?
 A fair and reasonable price- this might need
to go to arbitration

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 So that reflects the rights of
shareholders
 The principal intent is to ensure the majority
do not use their power unfairly as against the
minority or to adversely affect the company
and its future viability

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 The final aspect we need to
look at is:
 The responsibility of directors to account to
shareholders (and other interested
persons???!!)
 And we will talk a little about liquidation and
receivership
 That is for next week- the last week for new
material!

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 Oh, and before you go

 The format of the exam is the following:

 Five questions each worth 20 marks.
 It will be an open book exam
 Question one is a general question allowing you to draw
on the research and writing you did for your
presentations
 The other four include two parts:
 Part 1- explain the meaning of specified terms- each is worth
three marks (choice of three out of five)
 Part 2- problem question asking you to apply the relevant law
Each question will be headed up to demonstrate what general
topic is being examined). This part of the question will be worth
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