Securities law reforms will criminalise bad behaviour of company directors, compensate investors and lengthen term of prohibition

By Amanda Morrall

Tougher penalties for company directors caught out for 'reckless and dishonest' behaviour could see them jailed and potentially permanently barred from the boardroom under sweeping security law reforms proposed by the Ministry of Commerce.

The regulatory revamp, contained in 90-page cabinet report, also includes provisions for civil remedies for aggrieved investors and compensation. A separate recommendation in the paper (which addresses everything from financial advisory legislation to finance company moratorium requirements) is aimed at helping small businesses raise capital.

Commerce Minister Simon Power, in announcing the 'key decisions,' said the changes were necessary to restore public confidence and modernise securities law in New Zealand.

"The new legislation will be better for mum and dad investors as well as for companies looking to raise capital. It will provide clearer, more consistent information for investors, and clarify for issuers the obligations they have to meet.''

The 'liability' aspect of the new regime is three-fold, focusing on civil remedies and compensation for investors; 'making the most of serious breaches of directors' duties' and increasing the maximum period for the prohibition for directors that run afoul of the law from five to 10 years with the potential for the Higher Court to impose an indefinite period.

The recommendations, to form part of draft legislation, would see directors charged for breaching duties laid out under the Companies Act of 1993. Those responsibilities include:

• To act in good faith and in what the director believes to be the best interests of the company.
• To avoid carrying on the business of the company in a manner likely to create a substantial risk of serious loss to the company's creditors.
• To not incur an obligation unless the director believes at timetime on reasonable grounds that the company will be able to perform and obligation when it is required to do so.

Power said the changes were designed to capture "only intentional egregious breaches and therefore strike an appropriate balance between not deterring competent people from becoming directors, whilst providing a deterrent to dishonest conduct.''

The prime catalyst, Power states in the report, was the vacuum of regulation to deal with abberant finance company director behaviour.

"A concern expressed following the finance company failures was the lack of appropriate powers for regulators to take action against directors of those companies for apparent reckless or dishonest conduct. In addition, there are not any offence provisions that would deal with the intentional breach of directors' duties.''

Shareholders Association chair John Hawkins refuted the suggestion that the law, in its present form, was toothless.

"There are quite a number of sanctions that the Securities Commission had at its disposal but they did not avail themselves to what was there. It's only been the last few months that they've actually got around to doing anything, which we find exceptionally frustrating,'' Hawkins.

Hawkins said while the shareholders association's interests were peripheral to the finance company sector, the group had made a lengthy submission to the Ministry on how securities law could be improved.

"We don't wish to bash directors. We accept that from time to time there will be business judgments made. What we are concerned about is that fraudulent activity is jumped on and at least at the present time there is some action in that area.

Will it make a difference?

"I think if they (directors) end up going to jail, it'll have a few people looking over their shoulder.

"However, by and large we think the environment is improving in terms of investor protection."

The Law Society, which previously made a recommendation to the ministry, said it would be under taking a review of the 'key decisions'.

As for the capital raising initiative for small businesses (found on page 18 and 19 of the report), the following terms were proposed by Power:

• The offer is for equity or debt securities in a person that is a non-property company;
• NZ$2 million may be raised per 12 months;
• The company may have up to 20 investors per 12 months; and
• There is a cap of NZ$100,000 per investor per 12 months, unless the investor is sophisticated.

For these kinds of offers a very basic disclosure document would be required
that would state that:

• Because this is a small offer, it has an exemption from normal disclosure and (where relevant) trustee requirements; and

• The investor accepts full responsibility for making the investment decision and should seek independent financial advice if in doubt.